By Micheal Sauga at Der Spiegel
..........He was the face of the Reagan revolution, a young man with large, horn-rimmed glasses and thick hair, wearing a suit that was too big for him as he sat next to the hero of conservative America. As former President Ronald Reagan's budget director, David Stockman was the architect of the biggest tax cut in US history and the propagandist of the "trickle-down" theory, the Republican tenet whereby profits earned by the rich eventually benefit the poorer classes.
Thirty years later, Stockman is sitting on a Chesterfield sofa in his enormous mansion in Greenwich, Connecticut, an affluent suburb of New York, where the stars of the hedge fund industry conceal their tasteless mansions behind red brick walls and jeeps owned by private security companies are parked on every street corner.
Stockman is wearing a green baseball cap and a black T-shirt. It's a sunny early fall morning, but the mood in the brightly lit rooms is strangely somber. The rooms are empty, there are boxes stacked in the corners and a servant is wrapping the silverware in the dining room.
Stockman is moving to New York, into an apartment he has already rented in Manhattan. But it isn't entirely clear whether he is only moving to be closer to TV studios and newspaper editors, or if the move signifies a departure from his previous life. It was a life that took him through the executive suites of Washington politics and the US financial industry, a life that has placed Stockman in an almost unparalleled position to recount the aberrations of American capitalism in the last three decades. "We have a financialized, central-bank dominated casino," he says, "that is undermining the fundamentals of a healthy growing capitalist economy," he says.
Ironically, Stockman was the one who wanted to reshape that society, back in the 1980s, when Reagan made him the organizer of his shift to so-called supply-side economics. Like the actor-turned-president from California, Stockman believed in free markets, low taxes and reducing the role of government.
The First Mistake
But Stockman also believed in healthy finances, which placed him at odds with the California contingent on Reagan's team who saw themselves as lobbyists for industry and the military. When Reagan's chief of staff, Donald Regan, declared the phrase "tax increase" to be taboo after the 1984 election, Stockman knew that he had lost. But it was more than a personal defeat. It was a triumph of irrationality, one that led Stockman to permanently disassociate himself from his party's fiscal policies. "The Republican concept of starving the beast is the worst thing in terms of fiscal rectitude that you can imagine," Stockman says today. "It's even worse than the Keynesian models of the Democrats."
The debt policy of the Reagan years was the first mistake of America's conservative revolutionaries, but not the only one. There is another fallacy, one that Stockman also participated in when he went to work for the investment bank Salomon Brothers and later the private equity firm Blackstone after his ouster from the White House.
It was the time when it had become politically fashionable to unfetter the financial industry; a time when then-Fed Chairman Alan Greenspan, Stockman's old acquaintance from the Reagan team, was inventing a new monetary policy: Whenever the economy and the markets showed signs of weakness, he reduced interest rates, and when a large financial institution ran into trouble, it was bailed out with the help of the central bank.
Greenspan's policy of cheap money became a sweet poison for Wall Street, the chief ingredient of the dangerous debt cocktails brewed up by the wizards at London and New York investment banks, with Stockman front and center. The former politician became a virtuoso of the leveraged buyout, a complex financial deal in which in investor buys companies with borrowed money, restructures them or carves them up, and then sells them at a profit.
The deals made Stockman rich, but they also turned him into a junkie. His projects became increasingly risky and the towers of credit he constructed became taller and taller. "I was an addict," he says. "I got caught up in the process."
A Debt Republic
Disaster struck in 2007, when one of his highly leveraged companies went bankrupt. He was indicted on fraud charges, and the bankruptcy cost him millions and damaged his reputation. It became his "road to Damascus experience," as he calls it, when the financial crisis erupted a short time later. He concluded that the same mistakes that had destroyed his company also took the United States to the brink of an abyss: cheap credit, excessively high debt and a false sense of security that everything would ultimately work out for the best.
Stockman again became the rebel he had been at the beginning of his career. He gave up his position in the financial industry, started a blog in which he settled scores with both policymakers in Washington and the financial oligarchy on Wall Street and he wrote an almost 800-page analysis of the "Great Deformation" of US capitalism.
The conservative is furious over his country's transformation into a debt republic of the sort the Western world has never before seen in times of peace. A republic in which going to college is paid for with borrowed funds, as is the next military campaign. A country which hasn't actually dismantled its gigantic pile of debt since the crisis -- $60 trillion -- but has merely redistributed it. While the banks were allowed to pass on a large share of their bad loans to taxpayers, the government is in more debt than ever before.
The mountain of debt appears smaller than it is because the Fed keeps interest rates low. At the same time, though, all this cheap money is driving the United States into a risky race against time, one in which no one knows what will happen first: the hoped-for economic boom or the next crash. Experts, like former Treasury Secretary Robert Rubin, believe the current rally in the markets is in fact the precursor to the next crash.
The primary beneficiaries of the market rally seen in recent months are the 10 percent of top earners who own more than 90 percent of financial assets. But for average Americans, the policies instituted in response to the crisis have been poverty inducing. After the crash, millions of US citizens first lost their homes and then their jobs -- and now the social divide in the country is as big as it was in the 1920s. While wealth has grown at the top of the income scale, the median household, or the household that lies statistically at the exact middle of the scale, has become $50,000 poorer since 2007.
In the past, part of the promise of the American dream was that anyone who worked hard enough could eventually improve his or her situation. Today the wealthy enjoy most of the fruits of US capitalism and the most salient feature of the system is the fear of fear. No one knows what might happen if the Fed raises interest rates next year as planned. Will pressure from rising costs cause the government deficit to explode? Will the stock market bubble burst and will financial institutions collapse? Will the economy crash?
Only one thing is certain: In the seventh year of the financial crisis, the US economy is still addicted to debt and cheap money. Worst of all, the withdrawal phase hasn't even begun.
"There is no possibility of a soft landing (with the) markets as completely distorted and disabled as they are today," Stockman says in parting. "There will be some great conflagration. It's just the question of when."