Trump and the Fed’s Trillion Dollar Decision
Featuring David Stockman
Published on: September 4th, 2019 • Duration: 10 minutesDavid Stockman, the former director of the Office of Management and Budget under Ronald Reagan, argues that the Fed’s decision to rapidly expand its balance sheet in response to the financial crisis set the table for a breakdown in global economics and politics. Stockman argues that the knock-on effects from the Fed’s decade-old decision could have significant consequences. This clip is excerpted from a video published on Real Vision on February 25, 2019 entitled “The Economic Danger Posed by Trump.”
DAVID STOCKMAN: The Fed, led by Bernanke, increased its balance sheet by 1 and 1/2 times more than had occurred during the first 94 years of the Fed's operation. 13 weeks, 150% of what it taken 94 years to create.
The balance sheet of the Fed was $500 billion at the turn of the century. It had taken roughly 84 years to get there from when the Fed opened in 1914. During the first few years of this century, Greenspan pumped money like no tomorrow, trying to bail out the economy from the dotcom and tech crash.
That, of course, produced an even worse housing bubble and then the consequence of that in 2008 and 2009. But the point is that on the eve of the Lehman filing, the balance sheet of the Fed was about $850 billion. In the next 13 weeks, which isn't a long time in the scheme of things, the Fed, led by Bernanke, increased its balance sheet by 1 and 1/2 times more than had occurred during the first 94 years of the Fed's operation. 13 weeks, 150% of what had taken 94 years to create.
Now, that's just madness. There was no predicate for that. There was no historic tradition or learning, or even financial theory that says you should take the balance sheet from $850 billion to $2.2 trillion in 13 weeks. What it did was it fundamentally ruined Wall Street. All of the lessons that should have been learned were basically interrupted by that madness that Bernanke undertook. Once they had increased the balance sheet in this fantastic way, they didn't know what to do next. They just kept doing more until obviously, we got into Q2 Q3 and a $4.5 trillion balance sheet.
Now, I think that when you have, as we have today, a society that's so-- a public narrative, I should say, that is so focused on the minute and the hour and trading conditions in Wall Street, both the overnight market and the cash market, that we lose all sense of perspective when you look at things on a day-to-day or even hour-to-hour basis. But the fact is, when you take the balance sheet in a few short years from $900 billion to $4.5 trillion, it's the biggest financial fraud in human history.
Trump obviously promised that he was going to make the American economy great again and he said, check with me later, and I'll tell you how. Most campaigns have pretty thin gruel for policy content anyway, but his was completely content free. He said that we're losing jobs massively, which is true, but he didn't say how he would bring them back other than that we had bad deals, and that he was a deal maker par excellence. He would take the skills that led to his real estate empire, whether it was true or not, he would apply those to renegotiating all our trade deals, and that was going to make everything better.
That was complete nonsense. None of this had to do with bad trade deals. NAFTA was what it was. NAFTA didn't cause our trade deficit with Mexico to rise to $70 billion today when, in 1991, we actually had a surplus with Mexico at the same time that our trade balance with Canada has been more or less close to zero for the same 25 years. Now the point is, this is a function of monetary policy. It's the fact that we've inflated the costs and wages in our economy to a noncompetitive level in the global market, where we buy and sell goods, and money flows and finance flows in its trillions, day in and day out.
He had no content to policy. He just said, trust me. I'll make some good deals, and it'll get better. The point is, in flyover America, they were desperate enough for a change that they were willing to take a chance. I call it the Hail Mary of politics. Trump said he's the king of debt, and he's proving it at the federal level. It's bad enough when you have a giant deficit at the bottom of a business cycle in the depths of a recession or in the year or two of recovery. I don't think it really solves anything, but at least it's understandable in terms of the fiscal math.
When you're 10 years into a recovery, when you're at month 115, where we are today, and therefore, the second longest business expansion in history, you have recession facing you around the corner. It's written on the forehead of the economy, because sooner or later, the economy is going to roll over. Here's the key point and why the next shoe to fall is going to be fairly traumatic and unpleasant. He is going to need to borrow, in year 10 of a business cycle, $1.2 trillion, an unheard of number, over 6% of GDP at the same time that, finally and belatedly, the Fed is beginning to normalize its policy and particularly shrink its balance sheet through the QT program at a $600 billion rate.
Now, they make this sound very antiseptic. We're just going to let it roll off. That's not true. They're effectively, as an economic or financial matter, functionally selling the debt.
We are at a point of peak Trump. I actually, in my book, identify a specific date-- September 20, 2018. The S&P peaked at 2.940. That happened to be exactly 800 points higher than election eve, when it was 2,140. Trump called it one big, fat, ugly bubble, an overvalued market, an accident waiting to happen in the campaign. He was right then, and yet he's such an incorrigible egotist that he could not prevent himself from embracing 800 points, a gain that were utterly unjustified, and that are going to come back to bite him hard as the air comes out of this balloon.
The point, though, is it was only symptomatic. Embracing the bubble, I call that a rookie mistake. Ronald Reagan knew better when he took office. We had a mess then too, but he spent three years denouncing the failed Jimmy Carter economy, denouncing the failed policies of the Democrats. He never took ownership until we got to 1984.
Trump is making the opposite-- took the opposite position. Within days of being sworn in, all of a sudden, he was talking about the Trump bump and an economy that he was taking credit for that was actually failing. What he doesn't seem to realize is that at the end of every long business cycle-- we've only had two over 100 months-- you do get an unemployment rate down to 4% or 3.7%. That's like the law of economic gravity happening. He had nothing to do with it.
We know from the '60s, the first cycle that lasted that long, by the time you get to 3.7% unemployment, you're about a year away from a recession. We know from the 1990s, the longest cycle, 119 months, that when it hit 3.8 in the spring of 2000, we were less than a year away from the next recession. Trump has really made a huge mistake embracing the so-called booming economy, embracing the stock market. That's why I call it peak Trump.
The problem is, having made that mistake, as everything comes unwound this year and next year, which it will, he's going to get blamed for it. It's going to be same thing that produced Trump in 2016 will produce, I think, a left-wing populist income redistribution-oriented, "let's get the billionaires" candidate. That will mean some pretty serious repercussions for policy, and it will mean the end of the dream on Wall Street.