Talking Numbers - CNBC | Yahoo Finance

Sponsored by
Talking Numbers

Reagan Admin official: This is the economy’s biggest threat

Talking Numbers

David Stockman, Director of the Office of Management and Budget during the first years of the Reagan Administration, discusses the Fed and what he thinks it's doing wrong.

Few people on earth understand US macroeconomic policy quite like David Stockman. As Director of the Office of Management and Budget during the first years of the Reagan Administration, Stockman was a key figure in creating the modern tax code that sparked America's economic turnaround in the early 1980s.

Even though the markets are at record highs and interest rates at three-month lows, Stockman sees one giant threat ahead for the US economy. Stockman spoke with Talking Numbers about the Fed and what he thinks it's doing wrong.

(To see this interview watch the video above or read the transcript below)

Amanda Drury, Talking Numbers: "Can we ever exit our QE (quantitative easing) program smoothly? And, if we can't achieve that, at what point will it really matter to the market?"

David Stockman: "I think [the Fed is] in a dead end. They've painted themselves into a corner. Zero interest rates now have been in place since December 2008. We're headed towards seven years if we take them at face value that they're not going to raise interest rates until 2015. So, this is sort of a made-up doctrine by the seat of their pants. Ten years ago, no one would have thought this was remotely rational not withstanding some of the weaknesses we've had in the economy. But, after all, the GDP is now higher, we're five years from the crisis, and yet somehow, we seem to be addicted to stimulus in just a crazy way. So, I think they're trapped and I think it's a very great danger to the economy because at some point, they're going to have to shift. And, when they do, there's going to be a day of reckoning of pretty serious magnitude."

Drury: "You're clearly very critical of the Fed's programs. But, just to play the devil's advocate, since we've enacted QE, the stock market is up – we're sitting around record highs again – the unemployment rate down. Why is it so bad?"

Stockman: "It's so bad because, essentially, the zero interest rate and the massive bond purchasing have very little to do with the slow recovery that we've had in the economy. I think that was just a natural recovery after we had the big liquidation of labor and inventory at the time of the crisis in the fall of 2008. Nevertheless, we barely crept forward at 2% real GDP growth for more than four years – weakest recovery we've had in the post-War period after the deepest recession. The fact is most of the money that they're printing never gets out of the canyons of Wall Street. It goes into speculation. It goes into financial engineering and leverage, stock buybacks, and everything else. That drives the indices higher but it's really not doing much that's constructive for Main Street and it's only hooking the economy on ultra-low interest rates that aren't sustainable."

Drury: "So, if you were at the Fed right now, what would you be doing? How would you be doing it differently?"

Stockman: "Well, I think that it's long past the time that they stop the 'quantitative easing'. When you buy $85 billion of bonds a month, you are distorting the market. They haven't repealed the law of supply and demand. So, therefore, long-term interest rates on the Treasury and everything that prices off of them – which is most of the fixed income world – is artificially set today by the Fed's intervention. And, therefore, the market is being misled as to the true cost of borrowing and it creates enormous distortions."

More from Talking Numbers:

Watch: Why your money isn’t safe
Why airlines are trades, not investments: analysts
This chart is saying get out of Google: Technician


Follow us on Twitter: @CNBCNumbers
Like us on Facebook:


View Comments (528)

Recommended for You

  • Agents get subsidized 'Obamacare' using fake IDs

    WASHINGTON (AP) — Undercover investigators using fake identities were able to secure taxpayer-subsidized health insurance under President Barack Obama's health care law, congressional investigators said Wednesday.

    Associated Press
  • What a Marijuana ETF Would Look Like

    The changes taking place around marijuana for medical use and for recreational use are the biggest in almost everyone’s lifetime. There are quite literally billions of dollars up for grabs for those who ...

    24/7 Wall St.
  • CEO: Rivers to quit Clippers if Sterling stays

    LOS ANGELES (AP) — The interim CEO of the Los Angeles Clippers testified Tuesday that coach Doc Rivers told him he will quit if Donald Sterling remains the owner of the team.

    Associated Press
  • China's rich pimp their planes as jet market takes off

    Shanghai (AFP) - When a Chinese customer asked for the interior of his new Bombardier Challenger 850 jet to be covered with pricey black carbon fibre, the designer was shocked -- but happy to oblige.

  • U.S. housing turning the corner, inflation creeping up

    By Lucia Mutikani WASHINGTON (Reuters) - U.S. home resales hit an eight month-high in June, suggesting the housing market was gradually regaining momentum and would help the economy to stay on a higher growth path this year. The third straight month of home sales gains, reported by the National…

  • Portfolio Analysis: A Cost-Efficient $353,000 Retirement Plan

    My latest portfolio report card is for Mary in Santee, California. She self-manages a 401(k) retirement plan with $353,000 scattered across seven mutual funds and company stock. Before I assign her investment portfolio a final grade, let's examine Mary's portfolio. Still, her retirement plan misses…

    U.S.News & World Report LP
  • China food scandal spreads, drags in Starbucks, Burger King and McNuggets in Japan

    By Adam Jourdan SHANGHAI (Reuters) - The latest food scandal in China is spreading fast, dragging in U.S. coffee chain Starbucks, Burger King Worldwide Inc and others, as well as McDonald's products as far away as Japan. McDonald's Corp and KFC's parent Yum Brands Inc apologized to Chinese…

  • Detroit retirees back pension cuts by a landslide

    DETROIT (AP) — A year after filing for bankruptcy, Detroit is building momentum to get out, especially after workers and retirees voted in favor of major pension changes just a few weeks before a judge holds a crucial trial that could end the largest public filing in U.S. history.

    Associated Press
  • Play

    How to Build Your Own Annuity

    Instead of paying an insurance company, financial advisor Allan Roth recommends building your own "indexed annuity" that protects principal while giving market upside.

    WSJ Live
  • Apple Hints New Products Near With Bigger IPhones Looming

    Apple Inc. (AAPL) signaled that the long wait for new products is nearing an end. With bigger-screen handsets in development, Apple said yesterday that shoppers are delaying buying new iPhones, which will weigh on sales in the current quarter ending in September. Yet rather than dissuade buyers…

  • New India government urges changes to World Bank

    India's new government has called for reforms to the World Bank structure to reflect the "emerging" clout of developing nations in a meeting with visiting bank chief Jim Yong Kim. The government, which took office in May, said in a statement late Tuesday that Finance Minister Arun Jaitley stressed…

  • 6 Money Lessons You Should Have Learned Before College

    In a matter of weeks, the class of 2018 will be...

    Business Insider
  • Play

    Chris Davis: The Key to Long-Term Investing

    Davis has beaten the index by looking at cash flow, not daily price changes. Plus: Why more than half of all mutual fund managers don't deserve your money.

    WSJ Live
  • Airlines ban flights to Israel after rocket strike

    JERUSALEM (AP) — A Hamas rocket exploded Tuesday near Israel's main airport, prompting a ban on flights from the U.S. and many from Europe and Canada as aviation authorities responded to the shock of seeing a civilian jetliner shot down over Ukraine.

    Associated Press
  • Broadcom cuts 2,500 jobs in wind-down of baseband unit

    Broadcom Corp said on Tuesday it is winding down its money-losing cellular baseband chip business and cutting one-fifth of its total workforce, instead of selling the unit. Chief Executive Scott McGregor told analysts on a conference call that after Broadcom said in early June it would exit…

  • JetBlue pilot among 6 arrested in Boston drug bust

    BOSTON (AP) — A JetBlue pilot from Florida is among six people arrested by Boston police over the weekend in an investigation of drug dealing incidents near the Boston Common.

    Associated Press
  • Beef pollutes more than pork, poultry, study says

    WASHINGTON (AP) — Raising beef for the American dinner table does far more damage to the environment than producing pork, poultry, eggs or dairy, a new study says.

    Associated Press
  • Despite sanctions call, UK approves arms to Russia

    LONDON (AP) — Britain is still authorizing the export of arms and military equipment to Russia despite the government's call for tough sanctions over Moscow's arming of separatist rebels in Ukraine, a group of lawmakers said in a report Wednesday.

    Associated Press
  • Harley Davidson sputtering, Comcast loses more subs, Herbalife thwarts Ackman

    Today's trending tickers highlights moves in Harley Davidson, Comcast, and Herbalife

    Yahoo Finance
  • Microsoft CEO, Seeking Growth, Tells Managers to Step It Up

    The day Satya Nadella became Microsoft Corp.'s chief executive officer, he invited several dozen vice presidents to breakfast and had a simple, calm admonition for them: "Can you step it up?" The engineer's tone was a departure from the yelling and wild gesticulations favored by his salesman…