 Well, good morning. Thanks to everyone for coming to what turns out to be an even more timely and appropriate program than we thought. I want to first of all thank Mr. Ken Garshina of Mason Capital who is our sponsor for this event along with an anonymous donor too, but Ken is the man and in addition to being one of the two most successful Ostrow hedge fund managers in this country, the other one being Steve Berger who we'll introduce a little bit later. He was also a student of Walter Blocks. He got his economics degree under Walter and went on to the great success of Ken. We want to thank you very, very much for doing this and for all your generosity and for the work you do for our ideas in general as well as of course helping people be successful in these crazy fed times. So for our keynote speaker this morning we're honored to have Mr. David Stockman. I first knew David back when he was a congressman and I was working for Ron Paul and I can tell you as you can imagine the people who worked for Ron Paul didn't have much respect for the other congressman. But there was one guy we respected for his intelligence and his principles and that was David Stockman and we were thrilled to be able to work with him against the draft. David they're bringing that up again now so you're gonna have to get back to work but it's and other civil liberties issues and financial issues. He was hired away from Congress by the Reagan administration. They correctly thought he was the smartest guy on the budget and governmental financial matters. David found out that they weren't actually interested in cutting anything. They weren't actually they were actually interested in massive deficits and of course we're all shocked to know that the politician was lying including Ronald Reagan. David left. He wrote a book called The Triumph of Politics an extraordinary book. Unfortunately out of print but I think one of the great books ever written about how the government actually works. He's been a very successful investment banker. Many charitable activities. Right now he's writing his second book called The Great Deformation on how the Fed and the rest of the government is messing up the economy destroying the future and what we can do about it. So David's gonna talk about that subject this morning and David it's an honor to have you here. Thank you very much. Well thank you very much and a good morning. Until yesterday actually Lou I had been thinking this would be an ideal occasion to deliver a very erudite and philosophical summary of this book I've been working on now for a couple years. And then yesterday happened and the Fed did it again and I ended up thinking this is the final abomination. This is gone too far. It's street fighting time. This is beyond the pale. I mean it's undiluted lunacy. It's QEI quantitative easing forever which means we're gonna print ourselves to death as an economy. And so instead of the erudite philosophical view of how capitalism is being destroyed by status philosophies of one type or another I'm gonna launch into a full full strength tirade about the Fed just in case anybody's interested. And I think you have to start by saying before you get into any of the obvious issues the problem today is the Fed is being run by the single most dangerous man ever to hold high office in the history of the United States. And I would say in fact he is more dangerous than most of the other well-known culprits that I can think of put together. He is more dangerous than Geithner than Larry Summers than Alan Greenspan than Hank Paulson all put together we would have to reach back throw in a few old timers like William G. Miller and Arthur J. Burns and we still wouldn't be there. In fact I'd have to go all the way back to Mariner Eccles to come up with a package that could add up to the damage he's doing as a matter of fact when you think of what's happening today and what this Fed is doing you almost wish that Mariner Eccles would come back to life and that we could put him back in charge of the Fed because at least in some of you may know your history you read a lot of this stuff I know at least you would know that Mariner Eccles who was the first modern chairman of the Fed in 1935 was a Keynesian no doubt early for his time but he was a fiscal Keynesian who actually believed that money printing was bad that it would fuel speculation and that if the government was going to rob the people it should do it the honest way with taxes now that was that was Mariner Eccles back in 1935 and you know today when you look at what the Fed is doing robbing the people in so many different ways you almost wish that he would come back so I want to kind of do an indictment here I'm going to tick off a few things and I'm sure I'll miss a few and maybe if there's a Q&A time we can cover them first it's obvious that this is the death of capital and money markets there is no doubt about it the capital markets do not in money markets they don't price anything anymore they don't discount any future they don't allocate capital anymore all of this is simply a vast frenzied trading against the last maneuver and the last utterance of the Fed after all if interest rates in the money markets are going to remain zero through mid to 14 or 15 now that's six years of zero interest rates how in the world can anybody believe that when you have three two or three percent inflation is measured officially and probably a lot more than that if measured honestly that six years worth of holding the interest rate to zero has not completely destroyed and savaged any capacity of interest rates to signal things and to perform the price function that is essential in capital markets likewise how can anyone believe if they're going to be massively intervening in the so-called middle of the market buying 40 billion of MBS a month and on top of that continuing operation twist at about that amount how can anyone believe any longer that the yield curve means anything the yield curve is supposed to mean something that is the heart of the fixed-income market it is the heart really of the capitalist economy of the world and now it is being explicitly you know unabashedly in totally acknowledged way being manipulated and twisted and torque and turned in order to meet some fanciful notion that the Fed Open Market Committee has the monetary Politburo as I call it but certainly without a yield curve in the fixed income market which is trillion tens of trillions worldwide the markets obviously can't function and the same is true of equity prices they don't discount company earnings anymore they simply discount the next Fed press release when you have interest rates suppressed to this level the 10-year the central rate in the world market the 10-year US Treasury pushed down to 1.7 1.6 1.5 and their goal is to even lower it more although it backfired on them yesterday when you do that that interest rate which is the fundamental pricing mechanism of the capital markets is the reciprocal of asset values and so by definition the more you push down the long-term interest rate the more you're flating inflating the value of every asset class that you can think of both the financial assets real real estate commodities and so forth and so therefore the effect of this interest rate repression or financial repression is the misprice all the asset classes in the world and that then is another part of the witches brew that's emerging out of this so when you put all that together you say the yield curve doesn't mean anything interest rates don't mean anything asset prices are totally assets are totally mispriced the equity market is simply trading the Fed what what it means is that you've completely hollowed out and destroyed the capital market in effect in a metaphorical sense there is no one home on Wall Street there are simply computers trading word clouds with each other emitted by this central bank or that and the obvious point is how can you have a capitalist economy how can you restore capitalist vibrancy and growth and all of the things that even the Romney campaign is talking about if you've destroyed the capital markets which are at the center which are at the heart which are the lifeblood of the capitalist system I don't think you can and that's why I think that in the long run the central bank issue is not simply about printing too much money or some hyperinflation down the road or even what I've talked about here the clear and total distortion of financial markets in the price signal this is really about the destructive destruction of capitalism from the center out because if the central bank destroys the financial markets capitalism is going to languish and then the people will blame the bad outcome on capitalism and then legislative action will add even more now the one way to look at this in terms of in all of you are aware of this but how addictive dictated the capital markets have become to the latest nuance and move and maneuver and slight change in statement of the open market committee in the Fed is a study probably some of you seen but in this particular morning after yesterday and the crazy reaction that occurred in the risk asset markets around the world this is really a good statistic somebody went out went back and sorted the movement in the S&P 500 from early I think mid 1994 when Greenspan finally began to go off the deep end it took him a couple years but he ended up way off the deep end but anyway if you take that point until yesterday the S&P 500 index which is after all the measure of the heartland let's say of risk assets went from 425 value in early 94 to 1460 yesterday but if you remove from that 18-year history each 24-hour period before the FOMC met then the index did not quadruple from 400 roughly to 1460 but it went from 425 to 600 in other words in the whole 18 years the S&P 500 went up at about 2% a year except in the 24-hour segments before the 12 or I mean the 9 or 10 FOMC meetings a year all the rest of the gain so 85% of the gain occurred in the 24-hour windows before each Fed meeting so we have a Fed run economy there is absolutely no doubt about that and as I say when the Fed is running the economy capitalism can't survive second I think it should be obvious that this also means the death of fiscal governance if we're not already there already and I think we're doing they're doing a pretty miserable job but when you tell the Capitol Hill and when you tell the congressman even some of them that might wish to be you know marginally responsible when you tell them that you can borrow one year 15 basis points which you can this morning or three years at 35 basis points or out to five years at 75 basis points from Washington's point of view that's a rounding error that's close enough to free not to worry about the carry cost of the debt and so they don't and so they kick the can so they defer the tough issues what congressman really of either party in no matter how corrupt he is or maybe brave wants to bite the bullet fall on the sword disappoint constituencies if you can borrow for another year and hope things get better on the margin for 40 50 or 60 basis points which doesn't add up really to anything in the scheme of things the problem is this interest rate repression is only deferring the day when the whole thing explodes we are now objectively at the point where we have 20 trillion of debt I mean they say it's 16.3 but there's so much built into the pipeline that you can say today it can't be stopped even if we had a total miracle and change of mind there's 20 trillion that means that if interest rates normalize I'm not talking about some real you know inflationary flare up or some huge collapse in the financial markets which I think is going to happen but if they just normalize they would go up by 300 basis points because right now the weighted average cost of the federal debt is 2% so if it went up to 5% it would mean that the carry cost on the debt today is being understated by 600 billion dollars a year in other words before they even begin to think about any entitlement they might reform whether or not they could possibly see the logic of cutting defense in a world where we don't have any enemies industrial enemies left in a world where you know Romney is waving the bloody shirt at Russia why I mean Russia is a kleptocracy they would love to steal from each other they don't have time to steal from other people so why do we have you know this enormous defense budget so what I'm saying is that even if there was some inclination to begin to grab grapple with those issues as long as you make it so simple as they are today as the Fed is to finance another increment of a hundred billion a month or another trillion a year this will continue and we'll bury ourselves and even and even more debt that can't be handled I think the third thing that came out yesterday is that this is the real class war now you hear about that and you hear about all the time in the campaign but the real class war in America is that the Fed is declared war on savers the Fed is declared war on thrift the Fed is declared war on the fundamental mechanism of a capitalist economy where people are rewarded for deferring consumption by saving so that that pool of savings can go into reinvestment and all the other things that we know about on which a real vibrant growing thriving capitalist economy is built and so we have a determined explicit acknowledged policy in the Eccles building at the Fed to punish and essentially destroy savers I just saw this morning six month CD 40 basis points that's all you can get so what are we telling people about the future what are we doing to people who have already retired maybe with a decent nest egg what we're saying is that if you expect to get any return on this as per Bernanke you can't keep it in some place that's safe you have to go way out on the risk spectrum and we're making granny by junk bonds so that she has enough income coming in from the nest egg that her deceased husband left her so she doesn't have to you know buy dog food for dinner that's what this Fed policy is doing and it is profoundly destructive I think in a social sense and it's profoundly destructive in terms of everything that's wrong with our economy we've been on a debt bench for the last 30 or 40 years everyone knows that there's one figure that I use over and over and I'll repeat it today because I think it really captures the essence of where we are and why this policy is so wrong-headed and destructive in 1980 we had five trillion of debt in this country public and private in other words the whole credit market debt outstanding government financial sector households business and so forth a GDP of three trillion so the ratio let's call it the leverage ratio the economy was about one point five now the interesting thing is that that leverage ratio had been at one point five for a hundred years you could actually go back to 1870 and the best they can put the statistics together it was one point five and in between we had war and peace and boom and bust and William Jennings Bryan and Calvin Coolidge and a lot of other things and during that entire period it it was very close to that one point five times it seemed to be the natural leverage ratio for an economy then we went we took off in 1980 and went to the races today we have 53 trillion of total credit market debt outstanding on the economy we have a 15 trillion economy we are now leveraged 3.5 times 3.5 to 1 way off the charts you just look at it it's a straight line in history and then it's a hockey stick straight up and that is a big number I understand but if we had stayed on the beaten path if we had stayed on what I call the golden constant which seems to be been valid historically and it was consistent with a stable economy and growth and we were at one and a half times debt to GDP today we would have 22 trillion of debt on the US economy public and private not 53 trillion which means that we're lugging around three 30 trillion of excess debt you know in the household sector on the business balance sheets on the financial institutions and more and more on government and if you have that much debt and you're that far off any kind of historic norms why would you have a policy the central bank which is trying to force people to borrow even more and discourage people from saving when obviously we're totally upside down now the next thing that I think is coming out of this is what I would call the real triumph of crony capitalist corruption because when the Fed engages in this kind of central planning sense when it is all over the market all the time giving out signals and manipulating every aspect of pricing in the capital markets the yield curve and the components and constituents of the yield curve like yesterday the smart guys knew there were certain kinds of MBS mortgage-backed securities to buy because they were going to rally on the Fed's announcement that they were going to buy 40 billion a month but there were also certain kinds of MBS to sell because these were older MBS with higher interest rates and now that the Fed is driving the mortgage rate down even lower those are going to prepay at a higher rate than previously assumed the negative convexity is going to eat people alive and so yesterday some people shorted negative convexity and bought the MBS that the Fed is going to be buying made a killing and this is supposed to be a capital market now for some reason golden sacks printed the day before exactly what the Fed was going to do and if they were so bold I might say to print it in a message to their unwashed clients I can imagine what they were telling the real insiders now my point is that if you saw what happened yesterday coming and it was well telegraphed I believe a couple of thousand people made 50 billion dollars yesterday in 50 minutes as a result of the radical sudden lurching move moves that occurred in the fixed income markets as a result of this announcement the treasury bond actually rallied or the MBS the mainstream Fannie Mae 3% coupons rallied in a few minutes by 1% now when you realize there's about five or six trillion mortgage back securities Fannie Freddie Ginny may and then a couple trillion or so that are left from the private label issuance all of those were powerfully and massively affected yesterday by the announcement of the Fed and the smart traders were positioned left all the way to the bank and captured the windfall now the reason I think that is important is I don't begrudge some guy who was smart enough to do that but I do condemn a policy that creates random windfalls as a result of manipulation of financial markets for no better reason than some lunatic academic thinks that this is going to make capitalism better and that's exactly what we have today now how are the people in America ever going to be sold on capitalism when it's so obvious the system is rigged and I don't say that from some kind of conspiracy point of view I say that because Wall Street is cheek by Joll with the Fed Wall Street demanded this Wall Street said it would have a hissy fit if they didn't do it Bernanke is weak and the rest of that crowd around him is even weaker I mean did you see the vote yesterday set Bernanke aside is 10 to 1 10 sheep voted for this abomination on the open market committee so given that kind of performance it is very obvious to me that our system now is simply riddled with trading windfalls arbitrage of the next move the next signal the next slight variation or utterance that's coming out of the Fed the next part of my indictment is that they have now taken money printing and bond buying so far off the deep end I can't even see it anymore and you know after a while we get used to hearing you know 40 billion buy or QE1 was 1.2 QE2 was 600 billion now this one is 40 billion a month but it's really 80 because they were already buying 40 billion of MDS to replace the ones that are rolling off but let me just give a couple of statistical dimensions of this so that you can see that the Fed is all over this it's smothering the capital markets and there may not be anything left very long if we can get to 214 when Bernanke terms his term is expired there couldn't be anybody worse I could that anybody could imagine to a point I don't believe but the point is if you just look at the mortgage back security buying and what are they doing in the mortgage market we've already wrecked the housing market we've already wrecked mortgage finance we've already created this massive disaster that came in 205 to 208 and then in the aftermath and so forth but now they're in there driving down the yield driving up the price distorting and contorting further the housing market but here's how bad it's going to be these after everything we supposedly learned from the crisis of 207 and 208 Freddy Fanny and Ginny may are still alive and kicking down in Washington they know they've eaten alive about 180 billion of taxpayer money so far but they're all still functioning fact that's the only part of the housing finance system that's left but the point is they're still issuing 140 billion of new mortgage back securities a month and with the policy announced yesterday the Fed is going to be buying 30 billion from before the so-called roll-off now it's adding 40 billion so it's going to be buying 50% of every mortgage back security issued by the entire complex of these Washington based monsters who are using the taxpayers credit to stamp guaranteed on these mortgage back securities 50% of it now is going to be bought by the Fed another dimension of it is the following I like this one and I know it's something that probably a lot of you may be aware of I think the statistic is remarkable the Fed open for business in November 1914 and it took them 93 years till September 15 to be exact 208 to accumulate a balance sheet of 900 billion dollars and you know that was through two world wars a lot of unnecessary wars through the great society guns and butter through the Reagan deficit disasters that I had some knowledge and familiar familiarity with and so forth through the George Bush fiscal catastrophe that we had in the last eight years but through that entire period it took that long for the Fed to accumulate 900 billion of balance sheet mostly government securities you know of one maturity or another in seven weeks of sheer panic after Lehman went down and the next day they found an excuse to bail out AIG when they couldn't find one the day before in seven weeks Bernanke doubled the size of the balance sheet of the Fed he did in seven weeks another 900 billion that had taken 93 years to generate in the first instance and then in the first 13 weeks after the Lehman event the balance sheet of the Fed went to 2.5 trillion which means it almost tripled in 13 weeks relative to 93 years of history so it tells you that something is way out of kilter there is some lunatic doctrine there are some madmen in charge of the printing press who have no idea that you know simply printing money can't possibly cause any good and will most certainly generate a huge amount of bad after all if it were so simple is what this open market committee is saying there's PhDs on there I you know there's there must be something wrong in the water supply at Princeton I can't figure out you know if you're there long enough you must get brain damage or something I can't figure out where these people are coming from but if it were so damn easy why don't we just stop working why don't we just stop worrying and have the Fed print 8 trillion worth of balance sheet literally drop it out of a helicopter as Bernanke once advocated and our job would be one hour today to pick up enough money to get by and then do the rest of the day you know because I that's where it's leading this isn't you know it used to be sort of on the margin well you know should you have M1 growing at four and a half percent or three that you know that was a stupid debate but at least was fair now they're printing it with such reckless abandon with such enormous magnitudes that if this continues there will be a four trillion dollar federal balance sheet by our being a federal reserve balance four trillion federal reserve balance sheet by 214 when hopefully Bernanke's term will be up obviously the point is clear to everyone is that what's happening at the Fed today is Keynesian financial central planning on steroids and the worst thing is it's done by 12 12 unelected members of the federal open market committee who therefore don't have to answer to anyone and they have long terms and so it's even worse than the old style fiscal Keynesianism that you got from Samuelson and all the rest of them because at least then Lyndon Johnson had to go to Congress and try to persuade them to run these deficits and they were reluctant to do it even you know back then even Nixon who was totally out of control on the fiscal issue said we're all Keynesians now but he even at one point had to cut spending and raise taxes because it took at least some Democratic ascent but today we have 12 people who are self-appointed monetary central planners who believe they're in charge of the entire economy who have no clue that they don't know what the real growth potential of the US economy is with 53 trillion worth of debt on top of it with a leverage ratio of three and a half rather than one and a half after doing a 30-year national LBO how do they know what the growth real growth potential is of the economy anymore until we have a cleansing and a liquidation of all of this malinvestment all of this massive debt all of these distortions that have built up they don't know but they're presuming they know and that's why they're printing money because they're trying to get the economy to be at the potential growth rate that they decree as possible they said yesterday we're gonna give the statement yesterday this is why I call it QEI is we're gonna print money and we're gonna never stop until the unemployment rate comes down to where we want it well how do they know what the full employment rate is in an economy that has been as damaged impaired as this one has been that we all know the full the unemployment rate doesn't even measure anything I mean it's just like nonsense coming out of the BLS everybody knows that people are dropping out of the labor force the denominator is stagnant and so therefore they're using a statistic that most sensible people would never use even to manage their own little investment portfolio they're trying to run a 15 trillion dollar economy on a number that's that flaky and shaky and so therefore they have done something that I find really outrageous and that is yesterday it was almost like you know Congress is making us do it okay yeah we're printing a hell of a lot of money we're sucking up everything inside in terms of the Treasury market the MBS market yeah if we're probably trying to levitate the Russell 2000 and so forth but we have to do it because we have a mandate from Congress that says maximum employment and price stability well the point is if you ever read that it doesn't say you need an 8% unemployment rate or 4% or 5.876 2% unemployment there's nothing in there that's an excuse in order to simply take charge take control become the monetary Pellet Bureau of the US economy so this is a worse kind of Keynesianism because there's no check on it whatsoever it's just 12 people utterly out of control and therefore I believe and this is my last point that it's leading to a constitutional crisis it is going to be more evident to people with each passing day that you do have an unelected dozen people running this economy ruining the capital markets crushing savers allowing Washington to run massive debts without any carry costs creating windfalls crony capitalist windfalls for all the smart speculators who have a little inside knowledge about what's going on turning capitalism because they're print they're creating free money they're turning the free market into a doomsday machine and I think when that begins to settle in and people realize how out of control this is and hopefully the Republicans will finally wake up after all these years of sleepwalking maybe the issue will come to a head I'm not counting on it I'm somewhat of a pessimist but yesterday was so far off the deep end that maybe it's the wake-up call the country finally needs thank you