David Stockman and “Sundown in America”: is he right?


From David Stockman’s “Sundown in America” in today’s NYT:

This dynamic reinforced the Reaganite shibboleth that “deficits don’t matter” and the fact that nearly $5 trillion of the nation’s $12 trillion in “publicly held” debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many dramatic acts. It created a template for the Republicans’ utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy.

The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable “hot money” soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.

There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it — was purely another Wall Street concoction.

This is all red meat for those who would argue that we stand on the verge of some sort of economic apocalypse, and this is just one short passage from an unrelenting screed.

But what to make of it? I haven’t posted much about economic issues for a while, in part because I see steady improvement in a wide range of sectors (despite my ongoing concerns about sequestration).

How can Stockman say that there was never a danger of a depression? It seems a little crazy to me. Without the auto industry bailouts, TARP, and various other stimulus measures, I think we could easily have seen unemployment hit 15 percent in 2009/2010, maybe even 20 percent. Yes, a 21st century depression would look very different from a 20th century one, but the sweeping nature of the dismissal here seems absurd.

Some economists whose work and opinions I respect have chimed in on all this, summarized in a post by Mark Thoma in which he gives Stockman the “wingnut of the day” award. Thoma also quotes this nice bit from Paul Krugman:

Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.

Human beings have often grabbed onto the idea that we’re living in exceptional times, that we’re living on the verge of the end of the world. I think that apocalyptic impulse has risen with the economic frights of the last few years.

And I agree with Stockman on some of his points, including that the stock market is being propped up by Fed policy. But I don’t see any sign of the economy unraveling as Stockman seems to believe so fervently.