David Stockman: Bailouts Did not Prevent Depression
My favorite moment was when Alter asked Stockman if he knew GE's business better than Jeffrey R. Immelt, friend and advisor to President Obama. "Yes," Stockman replied and proceeded to explain precisely how GE Capital was a financial mess, bailed out by the administration. Alter quoted Immelt as saying GE was near collapse. Well, duh? It was. But it was near collapse because of stupid choices made by Immelt and others within the company. GE was invested heavily in credit default swaps (CDSs) and high-rish mortgage-backed securities (MBSs).
Alter tried repeatedly to defend Immelt, a lousy CEO. You might as well defend the last few CEOs of General Motors. Do you really want to argue CEOs aren't trying to game the system? Bailouts are easy money, so of course CEOs will claim the handouts were needed.
Stockman was absolutely correct that we do not and cannot know that the U.S. was on the verge of another Great Depression — but it was highly unlikely. The "financial meltdown" was a Wall Street issue that could have been contained by letting some of the corrupt, poorly managed firms fail.
Alter tried to argue that such failures would have been catastrophic, but that ignores dozens of safeguards protecting the average person. Insurance is backed by state and federal regulations, so the failure of AIG put nobody's home, auto, or health insurance at risk. Bank deposits fall under the Federal Deposit Insurance Corporation (FDIC). After the savings and loan mess, the FDIC was also assigned the role of protecting personal savings in non-banking institutions. The National Credit Union Administration oversees the solvency of non-profit credit unions. There are several other such federally chartered protective agencies.
In other words, Alter cannot prove Main Street was going to suffer any more than it has. I'd argue, as Stockman did, that Main Street has paid for the sins of Wall Street, Detroit, the housing industry, and so forth. The slow pace of economic recovery might be related to the fiscal policies of the Federal Reserve and the Treasury Department. Washington seems to care a lot more about the "too big to fail" corporations and banks than they do about small and growing businesses.
The loyal left continue suggesting there was an Obama Miracle that saved us. No one can prove that. The statistical models are too flawed to know that. However, we do know that bailouts increased the moral hazard risks — large banks and companies will assume bailouts are available in the future.
I'm going to address the so-called success of the automotive bailout in a longer post, but even that wasn't really a success. It saved no jobs and did nothing that couldn't have been accomplished sooner with bankruptcy. Oh, wait… GM and Chrysler went bankrupt anyway! Many firms that went through bankruptcy following various downturns or disasters still exist, and they didn't need government aid. That's the purpose of a reorganization.
Alter is simply unwilling to recognize that the Obama Miracle is a myth based solely on political bias. Alter brought up the fact job losses slowed and reversed under Obama. Yes, but that would happen normally in a recession, too. There is a point when job losses reach equilibrium in a downturn. Only so many jobs are lost, no matter what Washington does, and then recovery begins following the "creative destruction" process.
If I have ten employees, but automation allows me to layoff five, those jobs are gone. I might rush automation during a recession to save money, a common process in past downturns. Assuming demand does not fall to zero, there is a point at which I must have a certain number of employees, some automation, etc. In other words, the layoffs stop based on demand and production adjustments. Period. Demand decides everything for a business.
Stockman tried to explain this, but Alter didn't seem to grasp the logic. It was as if Alter believed that eventually every single job in America could have been eliminated. That's not remotely possible. As Stockman rightly explained, most of the job losses were in fields like construction that were created by the housing bubble. It was a bubble — the layoffs were going to happen at some point.
Economies in the midst of a bubble end up in recessions, during which the jobs created are lost. It happened after the 1987 investment bubble, the 2000 tech bubble, and the 2008 housing bubble. Jobs vanished with devastating speed. Does Alter want to imagine this time is different?
Obama was lucky enough, at least for a year or two, to be president during the normal "upswing" from a deep bottom. However, I certainly believe his policies have slowed the recovery. The Republican policies are not any better, sadly. Stockman has also stated as much.
Watch the MSNBC video and judge the fiscal debate for yourself.
A Litte Context
A quick background on Jonathan Alter places his views in perspective. Alter is a political journalist, yet another Harvard grad telling the rest of us how wrong we are. How much someone who was a media critic for a decade at Newsweek (or longer, since that seems to be Alter's main role at MSNBC) knows about economics is debatable. (For a complete whitewashing of Roosevelt and simplification of the Great Depression, read Alter's The Defining Moment.) Alter is a political partisan, period. Then again, I'm not sure some famed economists can see beyond their political biases, either.
David Stockman, on the other hand, has been a vocal critic of the Republican party and of Democrats. He doesn't seem to worry about offending any political group. I'm more likely to trust such a blunt force of reality whacking away at everyone in Washington. Stockman is another Harvard man (I do get sick of Harvard and Yale dominating the halls of power), and I don't view him as a great business mind — his investment firm went bankrupt before the 2008 downturn. But, I do respect Stockman's blunt honesty. It got him in trouble when he worked for Ronald Reagan, and it still gets him into hot water.
Last year, Stockman bluntly told CBS News that both parties were delusional or lying or both.
>> "[S]cratch the average Republican today and he'll say 'Tax cuts, tax cuts, tax cuts…. It's rank demagoguery. "We should call it for what it is. If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn't come up with $50 billion, when the problem is $1.3 trillion. So, to stand before the public and rub raw this anti-tax sentiment, the Republican Party, as much as it pains me to say this, should be ashamed of themselves."