America’s ship is sinking, says David Stockman, former U.S. Congressman and the budget director under President Ronald Reagan, and it will be almost impossible for our economy to recover. “Today, we have two ‘free lunch’ parties,” he says. “One is cutting taxes and the other is defending anything we spend, and we’re ballooning the national debt to levels that couldn’t be imaginable in the 1980s.” The problem isn’t partisanship, which is often blamed for the rancor and gridlock in Washington. It’s much simpler: “Bad ideas have come to dominate fiscal and monetary policy, and it’s wrecking the economy and turning Wall Street into a great gambling casino. The economy, as a result, is in big trouble, and I don’t see how it gets rescued because both parties are essentially committed to the idea that deficits don’t matter.”
The 2008 economic crash caused major damage, but Stockman argues in his new book The Great Deformation: The Corruption of Capitalism in America that it’s not for the reasons you think. It wasn’t the second coming of the Great Depression; instead, he blames the overreaction of Fed chief Ben Bernanke and former Treasury Secretary Hank Paulson for escalating the problem. Bernanke, says Stockman, “panicked and opened up the spigot of the monetary system like never before, and it was a complete mistake.” Wall Street veteran Paulson, on the other hand, had a “massive conflict of interest” and sought to “bail out Goldman Sachs, Morgan Stanley, and the rest of his buddies on Wall Street.”
Says Stockman, “I would have told the Fed to let interest rates rise, let Wall Street be cleansed, and let the gambling houses reorganize themselves under more cautious leadership. [The financial meltdown] wouldn’t have spread to Main Street. Let it burn out in the canyons of Wall Street where the whole mania resided, and where it would have ended.” The stimulus program, says Stockman, was “ridiculous” and “the biggest feast the K Street lobby ever had.” A better course would have been to invest in the social safety net, such as food stamps or the Earned Income Tax Credit, to ensure low-income Americans were protected, rather than “handing out a quarter of a trillion dollars to middle class taxpayers to buy another flat screen TV or Happy Meal.”
Stockman himself fell prey to the “bubble mentality” of the time, he admits. A private equity investor, he was indicted – with all charges later dropped – surrounding a failed leveraged buyout. “I think that’s the problem with bubble finance,” he says. “People get caught up in the daily rhythm of it, and you lose sight of the big picture. I was in the leveraged buyout business for more than 15 years, and it was easy to borrow massive amounts of money at low interest rates…I was like everybody else, but I got a wakeup call when one of my companies had too much leverage. Sometimes it takes a traumatic experience of that sort to remind people to look at the bigger picture: what’s wrong with what’s going on? I was no more exempt from ‘bubble blindness’ than many other people involved, including policy makers and investors.”
Unfortunately, says Stockman, many of those people aren’t heeding the economic warning signs. “In the next few years – maybe before the term ends of the current president – there’s going to be a massive financial crisis that will make 2008 pale in significance,” he predicts. “There’s a huge bubble in the stock market, and when it craters, it’ll pull everything down with it – commodities, stocks, ETFs [exchange traded funds], and anything else that’s tradable.”
The answer, he says, is to stay liquid. “Don’t take any financial risk. Keep your money in cash, in bank accounts and treasury bills. Do not borrow money…when the big bust comes, people are going to be sorry they took on debt. If you can somehow carry out your entrepreneurial dream on sweat equity and real cash equity, go at it, but people should not be lured into borrowing. Keep your money safe.”
Do you think another bubble is about to burst? How is your business preparing?
This post originally appeared on the Forbes website on May 14, 2013.
Dorie Clark is CEO of Clark Strategic Communications and the author of Reinventing You: Define Your Brand, Imagine Your Future (Harvard Business Review Press, 2013). She is a strategy consultant who has worked with clients including Google, Yale University, and the Ford Foundation. Listen to her podcasts or follow her on Twitter.