Former Reagan budget director David Stockman says the gold standard gets a bad rap and that the Fed's low interest rates spur Congress to spend. Stockman was critical of Paul Krugman who dismissed the ex-congressman as "a cranky old man."
By Steve Goldstein
April 3, 2013, 7:48 p.m. EDT
Market Watch
WASHINGTON (MarketWatch) — Fresh off an explosive essay in the New York Times, a debate with former Obama official Peter Orszag and a torrent of criticism, former Reagan budget director David Stockman says the gold standard gets a bad rap and that the Fed’s low interest rates spur Congress to spend.
Stockman, speaking to MarketWatch here as part of a tour to promote his new book “The Great Deformation.” perhaps to little surprise was critical of Paul Krugman, the Nobel laureate and Times columnist who dismissed the ex-congressman as “a cranky old man.” Perhaps more surprising, though, was Stockman’s disdain toward Eric Rosengren, the president of the Boston Fed.
The following is an edited transcript of his remarks.
MarketWatch : One of the criticisms of your essay is during the gold standard, they had plenty of ups and downs including more frequent recessions, so that’s not a cure-all.
Stockman : We don’t want to get into a discussion of 19th century economic history, but frankly the whole idea of too many recessions and too much instability is a Keynesian myth. If you look at the real history, the problem that they did have in the period from 1870 let’s say to 1914, was the National Banking Act. The national banking system was fundamentally unstable. It was set up during the Civil War to finance the war, and it put state banks out of existence as currency issuers. It said national banks could issue currency if it was backed by government bonds.
The problem was massive amount of debt was issued to finance the Civil War. When the war was over, there was still fiscal rectitude at large in the land, and in the next 40 years they paid down large amounts of the public debt. As a result of that, there was an inelastic currency, but it was the inelastic currency, not the gold standard, that caused the problem.
Secondly, the economy performed brilliantly during that period. Real GDP growth, it was nearly 4% continuously without inflation. Now there were periodic panics, mostly those happened in Wall Street. They didn’t spill over into Main Street and the middle and western sections of the country. For instance, the panic of 1884 had no effect on the economy of Ohio. Therefore, that was a period of good economic performance.
They had this silly chart created, who knows, 40 years ago by the National Bureau of Economic Research that shows all these periods of recession, without telling you that one, they couldn’t even measure GDP in those days. It’s all guesses, they didn’t have quarterly GDP and we can hardly trust what we have today. Those numbers were a lot of noise.
But you can tell the living standard rose over time, real income rose consistently and substantially, and the real GDP growth is unquestionably the best we ever had.
Stop beating up on the gold standard. I’m not talking about necessarily that now. What am I saying is, we didn’t have a Fed that was printing money like there is no tomorrow hand over fist. We didn’t have a Fed that was trying to micromanage, macromanage, adjust, manipulate, every aspect of the financial market and the national economy. That’s the problem.
MarketWatch : Since Nixon’s “abomination” as you call it, we have had some periods where government spending to GDP actually went down, like during the Clinton era. Doesn’t that show it’s just the choices made by Congress rather than the Fed to blame [for rising debt]?
Stockman : There is the issue that Congress ultimately is the fiscal authority. But my argument is, when the Fed becomes a massive buyer of bonds and debt and artificially suppresses interest rate below market-clearing levels, it’s a terrible signal to the Congress that debt is cheap, that running deficits is a viable strategy. So therefore they are induced to kick the can, to let it drift and avoid hard choices. Who wants to tell the public you are going to take your broccoli of higher taxes and lower benefits and spending if you can issue debt on a three-year basis for 40 basis points. That’s free. I was in Congress, they don’t do decimal math, OK? And they think the money is free, it’s a bad problem philosophically, we shouldn’t be doing this for the great long run, but it’s no harm today.
Then they have professors like Krugman who give them the disingenuous advice that the bond vigilantes don’t care. The market is saying, “fine with us, we don’t care, keep piling the debt on, we love it.” That is so much baloney. The reason the interest rate on the 10-year bond 10_YEAR -2.31% today is 1.8% or whatever it happened to settle today, is the market knows the Fed is buying half of the debt and is front running the Fed. And it is renting the bond on repo, 98 cents on the dollar, based on overnight money that’s free thanks to Bubbles Ben as well.
For a so-called Nobel laureate to claim the vigilantes are validating this crazy deficit expansion through the fact the interest rate is 1.8% is the height of disingenuous.
MarketWatch : But Bernanke did a recent speech on this, and he pointed out the bond yields of every industrialized nation, including Germany, have dropped.
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