Because I don’t have -- and have no prayer of ever having -- a Nobel Memorial Prize in economics, this statement is tantamount to blasphemy: Paul Krugman, the Nobel-winning economist and New York Times columnist, is wrong. At least when it comes to denigrating David Stockman’s cogent argument that the U.S. Federal Reserve is fomenting economic trouble.
Stockman, of course, is the former wunderkind congressman and budget director under Ronald Reagan, whose mammoth new book, “The Great Deformation: The Corruption of Capitalism in America,” is highly critical of the Fed’s role in managing our economy and has set Krugman off on a tear (and the book up the best-sellers’ list).
“The Federal Reserve has basically become a bubble machine,” he said. “There has been fabulous expansion of the Fed’s balance sheet since the crisis of 2008. And almost all of that new money created -- $1.7 trillion -- is simply circulated through the banking system, through the fingers of Wall Street, so to speak, and is back on the Fed’s balance sheet.”
Why is this so bad? “What it does is allow people to speculate and hit home runs,” he explained. “It doesn’t go to Main Street. It’s not helping the Main Street economy. And it’s crushing savers. Remember, if you are saving, if you saved your whole life and you have $100,000, you’re making $400 [a year] as a result of the Fed crushing short-term interest rates.”
Stockman is exactly right. The Fed’s “quantitative easing” policies -- which some Fed governors have begun to question, according to the minutes of the mid-March Fed meeting -- have been an unqualified boon to Wall Street. Not only has QE been a gift to traders -- they can trade freely on the Fed’s promise to keep interest rates low for the foreseeable future, and who have found a willing buyer in the Fed, at market prices, for squirrelly mortgage-backed and other complex debt securities -- but the Fed’s low short-term interest rate policy has allowed the money-center banks with access to the Fed’s discount window to back up the truck and get as much short-term funding as they need at virtually no cost.
Then, as Stockman notes correctly, banks pay virtually nothing to depositors for the use of their money, and they turn around and lend out those deposits at wide spreads. It all adds up to an industry that pays close to nothing for its raw material -- cash -- and has the Fed’s blessing to rake in the profits. In 2012, despite losing $6.2 billion in the London Whale debacle, JPMorgan Chase and Co. still earned $21.3 billion in profits, its best year ever.
Stockman blames Fed Chairman Ben S. Bernanke for the state of things. “Bernanke is the single most dangerous man ever to occupy high office in U.S. history,” Stockman told Rose. “It is terrible what the Fed is doing.”
It’s hard to know for sure why Krugman has it out for Stockman, but he took out his dagger after Stockman’s dystopic essay, “Sundown in America,” appeared in the Times on March 31, warning against the Fed’s dangerous policies.
“I was disappointed in Stockman’s piece,” Krugman wrote later that day on his Times blog. “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.”
On Rose’s show, Stockman said he knew Krugman when he was a young man working on Reagan’s White House staff. “He seemed to be like a pretty pleasant, astute guy,” Stockman said. “Something went wrong over the last 30 years. Maybe it is that aging doesn’t suit some people well.”
The two men faced off live April 7 on ABC’s “This Week.” “Zero interest rates are basically crucifying the savers of America on a cross of ZIRP as I call it,” Stockman said, referring to zero-interest-rate policy. “All this money is not getting out of the canyons of Wall Street. It’s going into Wall Street [and then] right back to the, as excess reserves on the balance sheet of the Fed. It allows speculators to borrow money for nothing overnight. And we get bubble, after bubble, after bubble.”
Krugman’s weak-kneed response was to ask Stockman, rhetorically, “You really think we should be raising interest rates with high unemployment?” He then went on to lecture: “We have this overly complex financial system which is why we need financial regulation to bring it back to simplicity. But it has nothing to do with excess. It has nothing to do with zero interest rates.”
I don’t know which is sadder: That the Fed’s low interest-rate, easy-money policies are literally creating the next financial bubble right in front of our eyes, or that Krugman, supposedly one of our greatest economic minds, can’t see it, even though the very same thing happened just eight years ago and led to the Great Recession of 2008. Either way, I agree with Stockman. We’re in for trouble, and sooner than we care to admit.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.)
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