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David Stockman’s Takedown of Private Equity

David Stockman gave his insights on Mitt, Newt, crony capitalism, and the private equity controversy this week on Dylan Ratigan’s MSNBC show. He laid the blame for the current mess not just on cronyism and corruption, but particularly on the zero interest rate policy of the Fed. No one tells this story better or more succinctly than Mr. Stockman, who has been there and actively participated in the system at the highest levels, both on the government side and the private side. He knows and understands the game intimately, and having been there and done that has become a leading voice in explaining its evils. He sent me this note as a preface to the video.

There’s nothing wrong with capitalist acts among consenting adults, except they should not be infused with cheap debt manipulated by the central bank, or a tax bias in favor of debt vs. equity capital, or a distorted corporate/individual tax structure which rewards tax free inside-buildup of value through high leverage, and then exit at 15% capital gains rate.

Due to all of these distortions, after-tax debt capital is way too cheap versus very expensive American labor which carries a 15% payroll tax burden. So LBOs become financial strip-mining machines which shed expensive labor and harvest cash to service the cheap debt. The free market is a wonderful thing, as long as the taxing branches and central banking branches of the state do not corrupt it with free money.

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