Dear Contra Corner Reader,
The following is a transcript of a discussion I had with Agora folks after Alan Greenspan revealed his shocking confession and left our offices.
If you haven’t listened to our discussion with Alan Greenspan, click here now to listen or read the transcript.
I did open the floor for questions, so to protect the identities and viewpoints of all involved, we’ve made each speaker anonymous. I’ll list my own name, but refer to the others by Speaker 1 and 2.
David A. Stockman
Editor, David Stockman’s Contra Corner
David Stockman: Before I start, I want to congratulate Bill Bonner for luring probably the most infamous central monetary planner statist in recorded history into this den of Libertarians and gold bugs and getting him to say almost everything except confess for what he ultimately did.
There was a lot of stuff that came out today that's worth talking about, but I want to focus on a couple of the whoppers that I heard. I do want to be respectful. I did know Alan for a long time. He does work on a two-track system. The analysis is here and the real world is down here, and this is where he participated and he has his rationalizations and so forth.
Everybody has to do what they have to do. The idea that the kind of central banking that we have now and that he practiced and that he really pioneered was meant to replicate the gold standard, is a proposition too far. It actually is the opposite of what the gold standard did and he wrote about so brilliantly and so concisely in that essay that I hope all of you will read if you never read it.
It's very short. It was in Ayn Rand's publication, I guess, in 1966. It's called "Gold and Economic Freedom". It lays it all out including the history. The reason I bring it up is that what central banking does obviously is the opposite of what the gold standard did because the whole thing was run by the free market.
As Greenspan said in that essay and I tried to mention today, he went through the pre-1913 world in which there were six or seven acknowledged recessions. They called them depressions or panics. They called them different things then. In each case the excess of credit that was created by the commercial banks was garrotted, was stopped, when the system ran out of gold and gold backing for the credit being issued by the banks. That caused a contraction, stopped the growth of credit. You had a recession and then the world moved on.
They moved into the whole wealth effects idea, which actually involves basically a supporting or putting a put under the stock market, which means that you're essentially indirectly setting the price of all financial assets from equities all the way over to the money market rate overnight and the treasury curve in between and so forth.
They do this because they think they can forecast the future, and based on the forecast from these giant models they have, DSGE dynamics they'll cast at equilibrium models, that based on that forecast they can steer the right interest rate, the right yield curve, the right level of the stock market, and that then obviously generates wealth effects, it generates credit expansion, it generates GDP growth and all the rest of it.
The reason I bring it up, and this is where the anecdote comes in, is in 1987 about June, I got a call from Alan Greenspan, and he said, "I have some really exciting news I want to tell you about, the good news and the bad news. The good news is I've been asked to become chairman of the Federal Reserve, but keep that under wraps. It's not public yet. The bad news is I have 30 people working for me here at Townsend-Greenspan, and if I go to the Fed I'm going to have to disband the whole firm that I've built up over 30 years, and I really feel an obligation to the people. The proposition is, would you like to buy my firm and take over Townsend-Greenspan and I'll be off to the fed, and you can make a go of this business?"
I said, "Well that sounds pretty interesting. Let me come down." We met with him, met the staff. He got out the financials, and this is why I'm bringing it up, I went through it in a couple hours because it wasn't that big, and I discovered that he had been losing money for years on his economic forecasting business. The only reason the firm was reasonably solvent was he gave a lot of speeches, got big honorariums, and when you stirred it all up he broke even.
The point is, if one of the most famous economists of the day who had a big practice selling economic forecasts from this giant model couldn't even make any money forecasting the economy, what do you think happened when he took over the fed, became the central banker of the world, tried to forecast the entire global and domestic GDP, and run the price of debt and money and stock and other financial assets based on those forecasts?
The other interesting anecdote about this is that he then shortly thereafter had hearings in the Senate Banking Committee because he had to be confirmed, and as you know today, he mentioned that he confessed that he has some very libertarian and unorthodox views. He didn't believe in the minimum wage. He didn't believe in farm subsidies and all the rest of it, but what he didn't tell you was that in that same hearing where he had his nice back and forth with Proxmire, famous Senator Proxmire from Wisconsin who, by the way, got a great rating from the national taxpayers union when Bill was running it because he was one Democrat who was actually oriented towards fiscal integrity and thrift and so forth.
When he had his hearings, after making these admissions of his unorthodox views, he did not talk about his 1966 essay on gold and economic freedom. Proxmire got out the last 10 years of his economic forecasts from Townsend-Greenspan. All of them were wildly wrong. They weren't even close. The reason that this is important is that the whole proposition of central banking is driven, at the end of the day, by forecasting these crazy dot plots that they have where they're forecasting the GDP and the price level and the unemployment level and the federal funds rate and so forth out two or three years you can see the same thing today. They're constantly and completely and always wrong.
The question remains, what's wrong with the free market that got it right for decades that has been improved by having central banking attempt, as he said it, to replicate what the gold standard did? The point of disconnect that we really didn't get into today and I think is interesting is the gold standard and the free market were part and parcel of the same thing.
Interest rates were set by supply and demand until you reach the limits of the banking system's ability to expand credit based on the backing or the gold assets that they had in their vault. The point that I was trying to make during my questions with him was, yes, the world changed in 1913, but it really didn't. The original Federal Reserve Act was drafted and conceived and formulated by Carter Glass, who was then chairman of the House Banking Committee.
He was a free market guy who believed in the gold standard and worried about Wall Street banks and so therefore created a decentralized system and only gave a mandate to the banks to be in the business of re-discounting bills coming out of the real economy, business and trade, based on receivables and inventory already produced.
The point that's really crucial is there was no sense of monetary central planning. There was no sense of macro-economic management. In that act there was no targets for unemployment or inflation or GDP growth or housing starts or retail sales or anything else. There was only a mandate to be a banker's bank. There was no FOMC. It was illegal, as I said and it needs to be emphasized again, to buy government debt or to accept government debt, bills, notes, or bonds, as collateral for loans from the federal reserve.
The only thing you could bring was good commercial credit driven by the capitalist economy that could then be discounted for cash by banks that needed either to replenish their deposits because they were losing deposits or needed to expand their deposits because their loan book was expanding. That was it.
It was only during World War I when the Fed mandate was changed to, one, allow it to buy government debt, and then he did kind of obliquely refer to something which I think is interesting without getting too lost in history here about why the Fed began open market operations and therefore buying and selling securities and therefore beginning of the process of trying to manage interest rates, the financial system and ultimately the whole GDP.
Their reason for it was in 1922, there was so little demand for Fed loans because the system was flush because all the gold was coming in from the rest of the world because we were a solid economy and the rest of the world was in the aftermath of the catastrophe and economic conflagration of World War I. With all this gold coming in, none of the banks were short on reserves.
Nobody was going to the Fed windows at the 12 banks in Dallas or California or New York or Boston or Philadelphia. The reason we have monetary central planning today, the reason we have the maestro, the reason all these other things we can get into is that the banks weren't making enough money. That is the reserve banks were not making enough money to pay their staff. They discovered by accident if they became more active buying and selling securities and they built up their balance sheet a little bit, they could earn enough to pay the staff.
Once they made that discovery, then it was off to the races, because Benjamin Strong became the head of the New York Fed, which was the heart of the system. He became friendly with the head chief central banker of the U.K. and France, as I talked about today. The three of them were called the Lords of Finance. Some of you may have read that book. It's a Keynesian book, but it's got some interesting history.
That led to 1924, '27, massive expansion of the fed's balance sheet designed to lower interest rates to help England stay on the gold standard or resume the gold standard at $4.86. Now Greenspan was right about that and some people today say Churchill screwed it up. He tried to resume the gold standard after it had been suspended like in all countries during World War I, but I want to give a slight defense of why they did it then to help understand how far we've come in the last almost century.
The reason that Churchill felt they had to go back at $4.86 a Pound was because that was the pre-war rate. People then believed that they had made a solemn promise with the savers and investors of their countries who had bought war bonds and liberty bonds here we call them. I forget what they call them in the U.K. In good faith, believing that they would be paid back 100 cents on the same dollars of 1914.
Of course what happened was they expanded credit so much during the war you had huge inflations, the price level in the U.K. went up 200 percent and France 30 or 40 percent and Germany like 1,000. There was a huge problem in the 1920s about resuming, but the reason they wanted to resume at the pre-war rate was to keep faith with all the people that had put up their money in a patriotic way to support the war effort.
What happened was, by then England was union infested. They had already launched the welfare state, liberals had in 1908. Churchill was actually part of that. The rest is history, but the point is when the Fed then began to dramatically expand its balance sheet in 1927, it did so in order to help the U.K. stop the gold outflow because they had basically created too much Pound based credit.
Someone said today this was a gold exchange system. It was. It wasn't the old classic pre-1914 gold standard which they call the gold bullion or the gold coin standard. This was an exchange standard. It had been promoted by the League of Nations. They had developed the idea that there was a shortage of gold in the world, but if the Pound was as good as gold, then the Bank of England persuaded the Dutch and the Swedes and the Danes and a bunch of other countries not to ask for gold when they built up excess Pound credits, but simply to accept the word of the Bank of England that the currency would be made money good and stay money good at the pre-war rate.
That proved to be impossible. Benjamin Strong tried to help, but the effect if it was to create so much credit that flowed into the financial system in the United States, and I mentioned this this morning but I think it's worth mentioning again, call money loans, which were basically loans to stock speculators, went from $1 billion in 1923 to almost $9 billion in late 1928, early 1929.
It was this massive flow of credit into the financial system that caused the stock market to soar. It created the basis for the collapse in 1929, and then the whole world unwound because the credit system contracted. The point is in Greenspan's great essay, he lays this out completely. He shows that the error was in credit inflation from 1914 to 1929 that has been fueled by the central banks first trying to fight a war and then struggling to resume convertibility.
It was that inflation that created a boom in the world market that the U.S. Fed into, by the way. We were a huge exporter and creditor, and we were the China of the 1920s. We were basically doing the same kind of vendor finance that China has been doing for the last 10 or 15 years. In other words, foreign countries who were trying to rebuild or dig their way out of World War I and the calamities that had happened, went to New York, borrowed money. There was a booming bond market in foreign bonds. Then that financing became the source for huge export demand from the U.S.
If you look at the numbers you can see it very clearly, when the stock market collapsed, the rate as which foreign bonds were raised dropped overnight to zero. The yields on paper that was trading, the secondary paper, rose dramatically because nobody wanted it. Within two years after the collapse in 1929, the default rate on foreign bonds was nearly 90 percent because lo and behold, in this credit boom, foreigners were borrowing money in New York and using the proceeds to pay interest on the money they had borrowed the year before, so the whole Ponzi came unstuck.
Our exports collapsed by nearly 80 percent between 1929 and 1933. When our exports collapsed we were stuck with overbuilt industries, steel, chemicals, agriculture. We were a huge exporter. Automobiles, we were a big automobile exporter. As a result of the collapse of these basic industries, capital spending went from boom time conditions like it has been in China and in much of the world pulled by China over the last 15 years, to practically zero.
In other words, we got a CapEx depression because export boom collapsed. There was massive overcapacity here like there is in China today. It was that dynamic that created the Great Depression. The reason I'm going into this is that 25 years later in 1965, Milton Friedman, who was a great Libertarian, a free market man and so forth, convinced himself that the problem was a contracting money supply when that was the consequence, not the cause. Basically said, if you read it carefully, that the Fed should have done quantitative easing in 1930, '31, '32. They didn't have that nice euphemism then, but his argument was they should have bought up all the government debt they could get their hands on and re-liquefy the banking system and so forth.
This is important to where we are today because a student came along who had a PhD advisor by the name of Stan Fisher and the student was Ben Bernanke. Ben Bernanke basically took Friedman's errors in this whole interpretation of the Great Depression, which the Fed caused in the '20s, not in '32 to '33. He took Friedman's thesis, Xeroxed it, got credit for it as a PhD thesis, and was off to the races.
Then unfortunately he tried a real-world experiment doing the same thing in 2008. This gets us to Greenspan as the central banker of the world beginning in 1987. He did try to say even though the original theory in 1913 was to replicate the gold standard, he did say I was trying to do that, but here is the story which is fundamental to all of this.
Between 1987 and the end of his term, let's just say the 19 years, the price level in the United States, and let's just look at the CPI index because that's as good as any, was 110 when he started. It was 200 when he left. In 19 years the price level nearly doubled at the consumer level. Even then they were fiddling with the CPI and under-measuring more and more what it was producing. It wasn't the same CPI, but let's take that.
If he was replicating the gold standard in a period in which the price level doubled and the trade deficit exploded, there would have been a massive outflow of gold, the banking system would have contracted as the reserves flowed out; there would have been a sustained period of deflation in the domestic economy of wages, prices, and costs; and the CPI would not have gone from 110 to 200. It would have gone from 110 to maybe 90 in order to drive down the dollar price of wages and commodity prices in order to compete with China.
In that environment, probably the tennis shoe business would have gone to China on comparative advantage and a lot of other labor intensive activities, but you wouldn't have had what actually happened, and that is a massive expansion of credit that went to the household sector and the middle class so that they could supplement their declining wages either from jobs that were being lost and off-shored or from the fact that wage rates, even though in nominal terms they were expanding were not keeping up with the CPI, so their real incomes were going down.
When I mentioned these numbers to him, I think they were kind of foreign but the truth is in 1987 summer, there was 2 trillion of household debt. When he left, there was nearly 14 trillion. That's 7X. During that same period of time, the GDP went from 5 trillion to 11, so that's 2X. None of that would ever have happened under a gold standard.
That gets us to the next point. That is there wasn't a savings glut. There wasn't this strange eruption from behind the Iron Curtain where they drained the rice patties of labor in China and brought them into Mr. Deng's export factories in the east and the girls who were working 12 hours a day, seven days a week had so much money left over and so much motivation that they bought treasury bills as Richard has been saying and so forth. None of that is really what happened.
What really happened is that as he was expanding credit here and inflating the U.S. economy at a 3 percent annual rate, the world was accumulating dollars that no one wanted. The central bank in China started buying the dollars, as did the Bank of Korea and the Bank of Japan, the Persian Gulf producers and so forth. What it did was spread the disease that he imported into the federal reserve to the entire world.
In other words, we exported massive credit expansion at the central bank level, which is the opposite of replicating what the gold dollar would do. As a result of that, there ended up a situation in which the central banks of the world went from 2 trillion of footings to balance sheet. I'm talking about all the central banks around 1995 to about $22 trillion today. That expansion led by China, but everybody else was in on the game, even the ECB once it got started, is what created the low yield in the bond market that was allegedly the cause of the conundrum and the savings glut that Greenspan and Bernanke talked about.
When you have the central banks with their big, fat thumb on the scale buying $20 trillion mainly of sovereign debt, it is changing the law of supply and demand. As Richard said, the price goes up, the yield goes down, and it wasn't because of a savings glut and these thrifty girls in the Foxconn factories making Apple's, if they were then, devices, but because the central banks of the world injecting in the system all the central bank credit and it's hitting a button on the digital computer.
You were buying bonds that had funded real things like aircraft carriers and sewage plants and federal salaries and so forth in the United States, funded real economic resources and they were being purchased with a fee of credit. That's the story of what happened. Sometimes the contra-factual is a better way of understanding where you are than the narrative history that you get from the establishment because, as I said this afternoon, Greenspan really, I don't think, was lying or trying to be duplicitous when he answered some of these questions we asked.
He has spent a lifetime, at least a late lifetime, in group think once he got inside the federal reserve and the whole central banking fraternity. They began to believe things that were the opposite of the essay that he wrote in 1996 and the whole history that he well described and that we've gone in the opposite direction of.
Now where does that take us? That's my last point. My point is it takes us to troubled waters unbelievably deep and unbelievably uncharted because even in 1987 when he went to the Fed and was testifying before the Proxmire committee, no one in their right mind would have predicted or expected that you could have 92 months running, or 96 actually now, of practically zero interest rates. No one would have thought it's even remotely less than lunatic to have 45 trillion of sovereign debt in the world. As of last August 13 trillion of it was trading at sub-zero interest rates, negative yields.
No one would have thought that the balance sheets of the central banks could explode to this degree. Remember, after all, the Fed opened in 1914 on the eve of the so-called Lehman Crisis. The balance sheet was 900 billion. It had been 250 billion when Greenspan got there. He left, it was 750. It crept up a little bit more.
In seven weeks, from Sept. 14, 2008, to the next seven weeks, Bernanke doubled the size of the balance sheet that it had taken 94 years to get there. Then in the 13 weeks after the Lehman Crisis, it nearly tripled, and then we continue on where we are today, and then everybody else in the world more or less adopts the same model.
This was unthinkable as recently as 2005. What does that mean, that they can keep doing it forever and that they've been sliding by the seat of the pants, making it up as they go along? All of this is true, but it's also true that they didn't know where they were going when they started. They kept doing it because they were reluctant to take a risk of allowing the system to adjust.
Now they are so far off the deep end that I believe all the central banks of the world are lost, paralyzed, divided, and essentially out of dry powder. People say, "Well they can just keep doing QE." I don't think they can just keep doing QE. The Fed finally stopped because even Janet Yellen and Dudley and the rest of them realized you can't keep creating something for nothing. You can't keep imposing what is essentially fraud, although they would never admit it, injecting that into the financial system.
Unfortunately, what this has done is basically house train the entire financial system of the world to price securities based on what the central banks are doing, not on some kind of fundamentals of discounted cash flow or any other kind of price discovery that we all knew about and thought what is the central function of financial markets.
They're all front running. Therefore you have the greatest bond bubble in recorded history created not just by the 20 trillion that the central banks took out of the supply in this godforsaken effort to manage the economy, but there's probably tens of trillions more that was purchased by smart guys in hedge funds and fast money traders, whatever you want to call them, who said, "If the ECB is buying Italian debt, I am going to buy it first. If they're going to be buying it for the next two years, I'm safe until they stop buying it. Then I'm going to put it on repo 95 cents on the dollar. My carry cost is zero. My price risk is zero because the central bank has already laid out its plan of how much it's going to buy. I'll capture the spread, laugh all the way to the bank, and have a longer night's sleep than the seven hours that Alan Greenspan talked today about he had after the Black Monday crisis."
Now, the problem with that is all bonds in the world are mispriced. The Spanish bond, the Italian bond, the French … Sooner or later France will be bankrupt certainly as socialism is going to kill it. Statism is going to kill it. The bonds until recently were trading in low basis points, under 1 percent. Everything is drastically mispriced, but people don't understand how big the debt market in the world is that's been mispriced and that is then fed in to all the other markets.
Remember, the treasury bond is the benchmark. Other bonds trade off the treasury. It spreads and currency adjusted and so forth. Then the debt drives the present value of real estate, the cap rate on real estate. The debt becomes very easy to get because people need yields and corporations issue 7 to 10 trillion dollars of debt around the world to basically buy in their stock. That feeds the stock price, and you can see the dynamics of the bubble.
Today, there is in the range of 220 trillion of debt, bonds, bank loans, other forms of debt in the world, compared to 40 trillion in 1995 when all of this got going. It took Greenspan a couple years to get what I call bubble finance going. In that 20-year interval, the debt of the world went from 40 trillion to 230 or 225 trillion. The GDP was 30 trillion then. Maybe it's 70 trillion today.
The debt of the world is up 5 1/2 X, 180 trillion. The GDP of the world is up 2.3X, maybe 40 trillion. We've had a massive expansion of debt to create a modest amount of GDP. Greenspan talked about it today and he said, "Productivity is declining and so therefore we're in a stagnant world." I think he's right about that, but the cause of it, and it's my last point, is the mispricing of the entire financial system has basically caused capital to drain to the financial markets rather than to be reinvested in growth of productive assets, efficiency, the whole capitalist thing.
What do I mean by that? I think if you look at it, there has been 20 trillion dollars’ worth of M&A deals in the United States since 2004 alone. I would dare say that 80 to 90 percent of those M&A deals were only done because they could borrow the cash so cheaply that, why not? It's not driven by the drive for capitalist efficiency. Half of these deals don't work. They end up writing them off. Wall Street says don't count the good will write-offs because it wasn't real money and so forth.
The point is, is that it has drained resources out of the cashflow and the balance sheets of businesses on Main Street from Fortune 500 companies all the way down, at least in the publicly traded ones, has drained into financial engineering and flows back into the Wall Street and the financial markets to fund stock buy-backs, massive 6 trillion or so in the last 10 years, M&A deals, honoring dividends.
If you look at most of the S&P 500 companies today, the non-financials, they're actually distributing more than 100 percent of earnings in stock buy-backs and dividends. That's a nonstarter eventually. What it's done is not just create a harmless effect in financial markets where asset values got inflated massively and a few people had enormous increases in their net worth like when Greenspan took office the net worth of … Who's our- I forget his name … Buffet, yes, thanks.
Buffet's net worth was 2.3 billion. Now it's 73 billion. It wasn't because the guy running a portfolio for an insurance company out in Omaha was such a brilliant, never before in history, investor. It was because the whole financial system was inflated by the kind of values that I've just given you.
My point is, as the financial market inflated and resources were sucked back in, they were spent on buying the shrinking amount of stock that was available. The secondary market exploded. There was an inflation in finance. Basically, a deflation of investment in the real economy.
I'll give you one number that proves it. In the year 2000, net real investment in capital equipment and structures in the United States was 550 billion. Last year it was 450 billion. Same 2015 dollars. We actually saw a 30 percent shrinking of real net investment after depreciation in the business sector of the U.S. economy as this system reached its peak.
That's why productivity has disappeared. It didn't happen because of some animal spirits failing or because some contagious thing came in on a comet. It happened because the bubble finance practiced by the central banks essentially channeled the flow of capital, cash flow, and balance sheet resources back into the financial system. It became a self-fulfilling cycle and we end up where we are today.
What is the take-away on this? The take-away is everything is massively overvalued. It really is because when this cycle stops and the yields start going up and you can no longer sell junk bonds or even low investment rate credits, corporations are going to stop buying their stock because their boards are going to be in trouble for buying stock. If you're IBM at 170 when your price is 130. As the corporations stop buying back their own stock. The stock market is going to adjust and the whole thing, I believe, will become unwound.
The take-away I think, today, is the last words that Greenspan spoke, in which he said, I think he said something to the effect that something's happening, but we don't know what it is. I think that's right. Something is happening. It's not good. We don't know when it's finally going to implode or explode or whatever term you want to use, but this is a dead-end game. This is a journey that was started upon by central bankers who were given too big a mandate. That is Humphrey Hawkins do what you have to do to make employment and inflation better.
One step at a time, one year at a time, one incremental expansion of central banking remit at a time, finally led to where we are today. It's unstable. It's dangerous. As I said the other day, sell the stocks, sell the bonds, sell the house, mortgage the kids, and get out of the way. Thank you.
Speaker 1: How is the central bank not limited in any way from buying everything? Sorry. If investors no longer buy stocks and corporations don't buy them back, what is to prevent the central bank from becoming the largest shareholder in every publicly traded company in the country?
David Stockman: In Japan it's becoming that way as a result of them buying ETFs through the back doorway. I guess in theory there's nothing to stop them. In practice I think that these people aren't infinitely crazy. I believe even the markets, as house trained as they have become, as addicted to the juice, to the stimulus as they've become, would be frightened if suddenly it was announced that the Fed is going back into Q4, QE4, QE5, because the first round didn't work.
I think this is a one-time trick and the Fed is already done. The ECB is under enormous pressure now, as I can read it, from the Germans who believe their savings banks are being destroyed, their savers are being destroyed. You heard what their finance minister said the other day. "This has to stop. It has to stop this year." When the ECB stops, sooner or later, Japan is already a bankrupt retirement colony. The thing will implode. They can't hold up the whole world market.
Where you have 2 trillion a year of QE happening still, it's in its last legs. It's unwinding. I do not think they can go back, and when that day arrives, you're going to see enormous conflict between governments and central banks, within the boards of central banks, about what to do. That's when the proverbial brown stuff will hit the fan.
Speaker 2: Today Greenspan was asked about going back to the gold standard. We were debating about our monetary system. Greenspan was a fan of gold. He was a Libertarian, and still he was the manual central bank from a manual way, I want to say. Then Bernanke totally Keynesian. Yellen the same. My question is, do you think that in the near or mid future, are we going to have a different monetary system? I'm not saying gold standard, but a different one? What needs to happen in order for politicians to start proposing it and start thinking about a change in this sense?
David Stockman: I think one thing that could precipitate a change is if the savers of America who basically elected Trump, and I think Greenspan was wrong and someone said it was because the savers were getting zero for nine years. I think that's exactly right. Savers are being savaged. If the Fed doesn't get its foot off the neck of the savers of America, the retirees of America, they'll be coming one of these days as populist to Washington with torches and pitchforks demanding a change.
What kind of change could happen? They've gone along with this because so far it's worked. The financial markets were reflated. The economy bounced back, weakly, tepidly, and mainly that's because that's what capitalism does. It wasn't because of all the credit the Fed created. It never got to the households. The households still have 14.3 trillion in debt, the same as they had in 2007 before the whole catastrophe started.
They thought it worked, and so people have been patient, but if the financial system blows up, which I think will happen and Trump will probably make it happen even more if he tries to expand the already huge deficits, then I think the patience will be gone. What I propose today is probably pie in the sky, but at least weigh station between where we are now, which is in total non-viability and where we should be. That is go back to the original Carter Glass fed. Carter Glass has some kind of historic authenticity, credibility, etc.
Give it the remit that it had under Carter Glass. Abolish the FOMC, prohibit the Fed from buying any more debt, put them under a mandate for the next 10 years to slowly shrink their balance sheet back to where it was when Bernanke started this, and allow the market to set interest rates and the money market, even if they go to 10 or 20 percent for a little while until the speculators are taken out. Let the market set the yield curve rather than having it constantly twisted and distorted and tortured by the fed, and put the stock market on its own so that if it tried to correct, it's allowed to correct, unlike the three or four times since 1987.
Some people say that's very risky, that will lead to a global depression, the end of civilization, the end of time. On the other hand, the alternative is to keep doing what we are now and lead to the same place. At least there is a path to something that might take advantage of the opposite of what Greenspan's model, macro-economic model that could make no money, and sell it to Alcoa and General Electric and General Motors back in 1987. Get that model off the table. Get the FOMC out of the market. Put the green eyeshades back in the Fed and their only job is to look at collateral and rediscount loans at the market rate plus a penalty. If you tried that, there might be a small hope, a small possibility, that you could work your way back to solvency, stability, monetary discipline and so forth.
Do I think that's going to happen? No. Do I think we're going to end up in some kind of massive conflagration? Absolutely. It's unstoppable. It's a doomsday machine. This is not a good thing to say to people who are trying to get people to invest or whatever all of you are trying to do, but it is a doomsday machine. I think we're beyond the point of no return.