Bubble buster

At the end of the first quarter, the major U.S. stock market indices were up about 10 percent. The housing market, a prime suspect for those looking for the cause of the Great Recession, is improving dramatically. February construction spending was up 1.2 percent over the previous month, beating expectations and continuing an upward trend. As of the end of February, the housing market had 12 consecutive months of month-over-month growth.

But these numbers, according to David Stockman, just make it hard to see how broke we really are.

Stockman was Ronald Reagan’s budget chief from 1981 to 1985. During that time, the United States emerged from a Jimmy Carter–induced recession that was, at the time, the worst since the Great Depression. In fact, on the back of Stockman’s work, Reagan was able to win a landslide election in 1984 with the message that it is “morning in America.”

Today, Stockman declares it to be “sundown in America.” He says the national debt of $16.8 trillion and rising is now greater than the annual Gross Domestic Product (GDP) and is unsustainable. He puts most of the blame at the feet of former Fed chairman Alan Greenspan and current chairman Ben Bernanke. He says the artificially low interest rates of Greenspan’s era—they fell from 6 percent to 1 percent in the space of about 24 months in the early 2000s—led to both the housing bubble and the crash in the financial services sector. The low cost of money has also made it too easy politically to continue to accumulate debt.

“The Federal Reserve Bank has become a serial bubble machine,” Stockman said. “Ben Bernanke is the single most dangerous man to occupy high office in U.S. history.”

Stockman makes his case in a new book, The Great Deformation: The Corruption of Capitalism in America, which is generating headlines despite the fact that Stockman has been out of high government office for nearly 30 years.

Because Stockman has been out of the public eye for so long—and because he made millions on Wall Street taking advantage of the same boom-and-bust cycles he now criticizes—critics have been quick to pounce. The Wharton School’s Jeremy Siegel said Stockman is saying “nothing new” and scoffs at the idea of a crash. “We’re nowhere near a bubble,” he said. “People have been predicting a collapse of the U.S. economy for nearly a century, and it keeps not arriving.” Siegel, famously bullish about America’s prospects, believes the Dow will go to 16,000 by the end of the year, and that 2014 will be another good year.

Other critics point out that when Stockman led Reagan’s economic team the federal debt nearly doubled, from about $1 trillion to about $1.8 trillion. Stockman admits that cutting federal spending is easier said than done, especially in the current era, which he says is dominated by “crony capitalism.”

But Stockman says that cuts in federal spending now, finally, have to be made. The national debt has tripled since 2001. Stockman says this deficit spending is the only thing propping up current GDP growth of around 2 to 3 percent. “I don’t know if we would grow even 1 or 2 percent if we weren’t borrowing at the current level,” he said. “And that level is not sustainable.” Stockman dismisses the falling unemployment rate, which some analysts have called a sign of recovery, as a “short-term drop.” He said the jobs number that “really counts” is total employment, and that number—around 132 million—“has gone nowhere for 12 years.”

Not surprisingly, liberal economists disagree with Stockman. Paul Krugman calls Stockman’s book “cranky old man stuff.” Jared Bernstein, formerly chief economist for Vice President Joe Biden, said Stockman is like a “crazy old man howling at the wind.” Of course, the fact that they are commenting at all is one sign that Stockman’s ideas still resonate.

But Stockman is unbowed by the criticism. “I’m calling out Keynesian economics,” he said. “So naturally the high priests of Keynesianism react.”