stockman former director of the office for management and budget during the reagan administration he's also author of the book the triumph of politics the inside story of the reagan revolution and we are just so happy to have you on capital account today thank you so much mr stockman for being here i'm happy to be here and we're happy to get your commentary because you've been very vocal very critical of the fed recently saying on national t.v. c n.b.c. you know last earlier this month that the fed and the lunatics that run it are telling the whole world on truth about the cost of money the price of risk and this is even before q e three was announced and their guidance was extended to two thousand and fifteen so first what is your core criticism of fed policy especially given the recent announcement it's based on the proposition that a monetary policy bureau twelve people sitting on the open market committee can run a fifteen trillion dollars economy in the united states and basically drive the entire world financial system it's just not sensible they're painting themselves

into a corner they're really destroying the capital markets in the money markets interest rates don't mean anything anymore it's entirely administered manipulated by the fed the yield curve is been mangled i mean they call it operation twist for growing out loud so how can you have a vibrant capitalism that we're if the capital markets have been totally suffocated and taken over by the twelve people sitting on that open market committee who appointed themselves the committee to run the world where we're going into a dead end here in which central banks are the fundamental threat to the economic future so then on that note is that the existence or the mandate of the federal reserve you disagree with or is it more specifically these extraordinary policies that we've seen the fed embrace since the financial crisis and. and people that

have embraced those policies that you think are the problem well i think it's a question of mission creep if you go back to the one nine hundred fourteen act the only purpose of the fed was to provide standby liquidity when banks came to the fed to its discount window and were willing to pay a penalty rate for short term funding there was no mandate to man to micromanage the g.d.p. by the order by the year or even by the week and month which they seem to be doing now there was no sense that the private economy couldn't function on its own with constant nursing by the federal reserve so that's where we started and after one hundred years we drifted to the very opposite end of the spectrum where literally every dial in the financial universe is of interest to the fed and they think they're in charge of it so i would call it massive unrelenting mission creep that's

reached the point of no return as the point of no return so then what is the antidote at this point where we've never been here before in history there's never been a central bank that has had the arrogance really that the fed has today there is never been a. train of central banks in the world competing with each other to print money to buy bonds to massage the markets to control and manage things the way that the central banks are doing today so we're in uncharted waters and i can't believe anything good will come out of it because it defies every principle of sound finance that anyone believed in part in one nine hundred eighty i mean prior to one nine hundred eighty you couldn't find economists who would say let's have zero interest rates for six years we have is exactly. what the fed has promised to do

now beginning in early two zero zero nine and extending all the way through to fifteen there is no precedent in history for a fed chairman saying i'm targeting the russell two thousand you know in index and very speculative and high high beta securities in order to levitate the wealth of the u.s. economy and fool people into thinking they're wealthier so they'll spend more and on down the line this is made up stuff it is very dangerous and it's. defies every principle that i think existed prior to the one nine hundred eighty whether you are on the conservative side or the more you know liberal side in those debates that happen prior to nine hundred eighty so we have really the fed has painted itself into a corner it has no clue on how to get out it says trust us when the time comes

we'll know that we have to begin to on wind this massive balance sheet or begin to allow rates to rise but i think if they even hinted they were going to do that there would be a massive hissy fit in the financial markets be there or you know instantly and they would realize that they have taken themselves hostage but if you david stockman could say ok here is my plan for dealing with this unprecedented direction that central banks have gone specifically to fad since we're in the u.s. what when you give it your policy solution when you say ok let's figure out how to unwind this thing and get rid of a fad would you say ok let's limit the fed's mandate would you say let's. limit the fed tools yes well first week the fed has a mandate but it's a very very modest maximum sustainable employment mean we don't know what it means in this. kaname it has been so injured and impaired by the serial bubbles in the

massive debt build up we've had for thirty years so the idea that they have to target four percent or six percent or seven percent unemployment is wrong it's not even in the mandate likewise where do they get the idea that two percent inflation is in the mandate the statute doesn't say that in as a matter of fact every thirty years you would cut the purchasing power of the dollar and a half at two percent so they need to get off this mandate jag they need to forget about quantifying these things and then they need to begin to step back let the capital markets breathe and give us a chance to have some free market prices by that i mean free market interest rates i mean let the yield curve perform based on what thousands and and millions of investors think not what twelve people on the monetary policy bureau think and if

we do that we can basically begin to crawl off this ledge that they're on all timidly we should have the fed as some kind of great keynesian master trying to micromanage the economy and manage the business cycle we need to allow the private enterprise system to heal itself as i say and then move along the path that the millions of people who participate in it each day. reflect in the choices they make so you. know just to be clear you think that the market should set interest rate absolutely i mean everybody believes for a hundred years or two hundred years even when the fed was created william and chesney martin the great chairman of the fed in the fifty's in the sixty's didn't have the presumption the arrogance to think that he. micromanaging the economy by

fine tuning the interest rate every meeting in between meetings and between the lines of the smoke signals they put out with their meeting statements and so forth of course the only way that we can ever heal the system is to get free market praise back into the capital markets that means the money the overnight rate the money market rates should be set by the market not by the fed it means the bond rate ought to reflect what people think the long term risks of sovereign debt and the various other kinds of debt that are priced from it really bear so it sounds kind of strange to mention the fact that we ought to have free market interest rates but you know that's really what capitalism is based on yeah it doesn't actually sound strange to us we talk about that a lot on this show but i think it may sound strange to some people

a few blocks from where i sit here in washington i don't want to belabor the fed too much for but one thing i did want to ask because i think it's very interesting that you describe it as mission creep and earlier we were talking in our meeting about how in two thousand and one you had obviously nine eleven a horrible event but after that a couple of wars and i don't want to draw a straight line through history that's jagged but you got ten years of war that you could argue went in a direction of mission creep and just some unprecedented things that we hadn't seen before would you say that the two thousand and eight financial crisis with that pivotal moment for federal reserve policy and involvement in the financial system by policymakers yes exactly i think that's when we went over the deep end after all why did we have this massive meltdown it was either one of two reasons either there was massive criminality and they should be back you know paddy wagons and arresting lot of people or there was a massive monetary student. ation massive money creation that fuel the

kind of speculation the kind of asset price increases that we saw and wanted finally to correct itself now we have never really made a policy decision about that but since they haven't arrested anybody then what was the cause of this massive conflagration we had well how you say it was the fed on their ford to do more of the same to pour the kerosene onto the yeah we are which is essentially what they've been doing since two zero eight right it's going in exactly the wrong direction very interesting david stockman considered overly dependent addicted to the fed the money that's can't function it all is you as you see the markets fall by the day i are simply word clouds emitted by central bank i completely agree with david stockman i'm so sorry to interrupt we have to go to a break wrong quick but we're going to have much more time for you to talk about

that in just a minute david stockman former director of the office of management and budget still ahead don't worry i'm sorry i had to cut him off we had a hit biz break but we will get david stockman to take on ending too big to fail banks will also hear from some of you at home during our viewer feedback segment but first your closing market numbers.

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welcome back let's get straight back to our guest david stockman former director of the office excuse me of management and budget during ronald reagan and before the break mr hoffman i'm so sorry i did not mean to cut you off especially during such an eloquent speech that you're making we didn't have to hit that break though but we were talking about you blame the fed for a lot of the wrong doing and leading up to the financial crisis so why would we allow them to do the same thing afterwards i hope i paraphrase that properly i want to stick more to this point of how the financial crisis was handled and what we see now because we still have these too big to fail institutions that are bigger they're too big to fail or too much bigger to fail than they were several years ago

and yet we still don't really have a solution to that and they are talking now about making a tighter volcker rule or at least reportedly according to bloomberg some of the lawmakers who have been looking at j.p. morgan's whale trade are saying we're going to push for that but even in the situation where we had a tighter volcker rule a more narrow volcker rule would that rein in too big to fail risk in your view no no i don't think so if they're too big to fail then they're too big to exist and we can't solve this problem with more regulations or two thousand two thousand pages of statute and so forth that we've had i think we have to recognize that banks are really wards of the state to the extent that one they have guaranteed or insured deposits trillions of them backed up at the end of the day by the taxpayers of the united states and second they have access to the fed window so that if they get themselves really in a corner. you know their funding is mismatched and they can't fund overnight they

can go to the fed window and get money now as long as those two things exist there is massive moral hazard there is a danger that they will take make reckless investments or have their own cheats. that are two illiquid or two leveraged or two mismatched between long term assets and overnight funding all the things that we saw in two zero zero eight and as long as that exists we're going to have big trouble so i think we need a fundamental reform that goes back to glass steagall or maybe even before that and says if you want to be a hedge fund then be a hedge fund but no deposit insurance no fed window you're out on your own you're a free enterprise institution like you claim you are on the other hand if you want to be in the narrow banking business taking deposits and making low risk liquid

loans then you can have deposit insurance then you can have access to the fed window and the big banks will have to decide and probably split themselves in half or if they don't do it someone should do it for them but the idea that we still have multi-trillion bank balance sheets in these big banks and that the six big banks still have eight or nine trillion dollars worth of assets you know tells me we've learned nothing from two zero eight and we're just courting another crisis somewhere down the road you know this wasn't a one in one hundred year event that happened in september two zero eight it's something that's going to recur as long as we have central banks dedicated to fueling financial bubbles which is essentially what central bank policy is all about today yeah. that is unavoidable so i do want to ask because i know i've heard you in the past in interviews say that there there should have been tarp there

should have been bailouts like capitalism work to let banks fail that systemic really important was just basically propaganda but my question to you because some guys that have come on this show for example richard duncan have argued that while they agree with that assessment for capitalism they say we're not even in capitalism and. more than after nixon closed the gold window once and for all and the us was not paid to anything that allowed for such a massive credit expansion that if you apply just the tenets of capitalism let systemically dangerous institutions fail. branding dramatically that we'd actually have a massive depression just because of how much credit there is what do you say to that view where i don't buy that entirely i think we've buried ourselves in fifty three trillion dollars worth of debt public and private the united states the question is why do we keep adding to it i'm not saying we go back to one thousand nine hundred seventy overnight i'm saying we have to allow interest rates to rise

substantially so that credit creation is held down and we don't get back into the same pattern of excess growth that we had for ten or twenty years leading up to the crisis so i think we can go back to basics one is getting the fed out of the daily management of the economy and second alawi interest rates to begin to clear the markets and rise third begin to put some incentive back in the system for saving rather than borrowing and i think if we lay out a program of that sort that we can get there the idea that since huge mistakes were made in the last forty years that we're totally captive of those mistakes i think is wrong but the idea that these mistakes clearly have led to the crisis that we have today is correct and we need to learn from that and begin to try to reverse

direction and before we go i only have a minute i got to get one tax question in there i want to ask about the fiscal side of this and just because of one proposal that's well known simpson bowles for example would that kind of a plan be a good idea and let's not take the whole thing about the whole kitchen. but let's take their tax plan which has income taxes the rate lowered by getting rid of all of the deductions and all of what are called tax expenditures and the loopholes would that be a good move for tax reform well i think in syria mind even old never happened in the real world because that trillion dollars of loopholes or tax expenditures they talk about you know goes right to the core of crony capitalism two hundred billion of that is the special rate for gap will get you know we're hearing about today a fifteen percent in the lower rate for dividends in the other investment preferences another hundred eighty billion is the medical preferences another

hundred seventy billion is retirement and say ira and so forth so i think they're barking up the wrong tree on that we need a new revenue source to pay our bills and it needs to be a consumption oriented tax because the fundamental problem in this country is we're living way beyond our means we're consuming way too much and so therefore we need to tax that which we need less consumption is clearly what we need less of now of course that would slow the economy down in the short run but we have to get from here to there we have to sort of you know take our medicine and people don't want to hear that the politicians don't talk about it and as a result we have this meaningless debate and we continue to kick the can down the road i just don't think it sustainable much longer all right well i really appreciate you being here everyone else has a vat tax not every but most other countries many other so it's definitely something that others have taken up i really appreciate you being on the show david

stockman thank you so much for your insight today he's former director of the office of management and budget under ronald reagan. all right we just have a couple minutes but it's friday so let's and on viewer feedback here is a comment i think lauren lyster may make more money on hulu because who has a lot more commercials than you tube maybe we should just watch capital account on hulu but comment on you tube. said that and i think that you should do whatever you want to be happy with any form that you watch the show in but i do think that you and all of our viewers should go check out our newly launched facebook take

a look at that this is live now i'm a proper facebook member i guess now never been on before so go on here like it we're going to post all of our shows there plus we're going to have fun web extras like bloopers and photos and behind the scenes clips and we'll start doing some fun things like surveys and caption contest so go check it out and let's move on because someone said something so amazing and it got a lot to like signature than fifty percent who agrees that you learn more in twenty eight minutes about fiscal and monetary realities around the world watching capital account than watching twenty eight hours of mainstream financial news well a lot of you guys like that so i really take that to heart that we're on the right track and informing our viewers in a different way than when you get around the clock on the mainstream media now we had jim rickards co-host yesterday and we had a huge explosive response here is one comment this is phenomenal and i'm only halfway through it jim rickards drops some truth bombs and then another said r t

give jim rickards his own show please it's too awesome listening to him only as a guest and that had a lot of likes and then john the telling i said is jim rickards about to get his own show on r t after co-hosting with lauren lister let me just say that he's certainly good he is an amazing co-host and we absolutely love having him on now someone row. is dimitri our producer related to putin how else did he get this gig street legal oh it said that and no he is definitely not related to putin he is greek he got this good because he has some large he had a vision he was an amazingly informed financial blogger and study or of finance and all of these guests that you see and the deep commentary that we have really can be attributed to his vision and so i just want to make sure that we pay him that due respect when viewers have more and great show as usual i'd like to hear the question what should our viewers do to prepare for the upcoming financial calamity asked of every guest you have i think that's a great idea we want to start doing a segment where we get the bits and bobs of like one question asked of several

guests and can put a lot of gather for you so i think you have a winner for the first one there was another bit of negative commentary but oh we're out of time i can't get to it from as far as long as something like that next week because that's all we have time for that's it for our show today thank you so much for watching and make sure to come back on monday because jim grant will be joining us once again and in the meantime you know you can follow me on twitter lauren lyster you can like us on our facebook page which is narrow and give us feedback at youtube dot com slash capital account where you can still see all of our shows give us any of your feedback and have a great weekend. the friendship asian of russia has started again after two hundred years up at the.

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