Disclosure: I’ve been a fan of David Stockman ever since he got in trouble for speaking the truth as Director of the Office of Management and Budget under President Ronald Reagan in 1981. As part of the Reagan Revolution, he’d had the audacity to disparage certain aspects of its supply-side policies! So I was thrilled when he told me that he has been reading my site. And then one day, I received an advance copy of his latest book, The Great Deformation: The Corruption of Capitalism in America.
What an awesome romp through the economic, financial, and monetary shenanigans that culminated in the financial crisis of 2008, and its aftermath! It hones in on the Fed, Wall Street, corporate America, and the bog of “crony capitalism” and “central planning.” He is consistently bipartisan: when he bashes Mitt Romney in one chapter, he’ll bash President Obama in the next—because financial and economic principles matter, not party affiliation. An attitude that got him in trouble with the White House back in the day. And he does it in a pungent voice, kicking shins left and right, and knocking out a few teeth too, while vacillating in the gray area between rage and humor.
In Part I, “The Blackberry Panic of 2008,” Chapter 1, “Paulson’s Folly: The Needless Rescue of AIG and Wall Street”—the titles are part of the pleasure of the book—sets the tone with its bloodcurdling analysis of AIG’s bailout and who benefited from it. He aims, as he writes, “to unpeel the onion of obfuscation that has emanated from Wall Street, bailout apologists, and the trio of Washington economic doctrines that assume the state can revive a failing economy when, in reality, it is a failing state that is crushing what remains of Main Street prosperity.”
Skewering company after company for their financial practices, he calls Goldman Sachs and Morgan Stanley “the last two predators standing,” GE Capital an “unstable house of cards,” and GMAC “the single most malodorous” of the financing companies. Their “bailouts hemorrhaged into a multibillion-dollar assault on the rules of sound money and free market capitalism.” And he ridicules Fed Chairman Ben Bernanke’s rationale for printing money as “Great Depression bugaboo”
He lambasts Republicans not only for having opened the Treasury’s floodgates with TARP but also for having turned the Fed over to the “money printers and Wall Street coddlers” Alan Greenspan and Bernanke, who congratulated themselves for “the phony prosperity they fostered.” Yet Bernanke’s “bailout spasms” of 2008 confirmed the “triumphs of crony capitalism.” Not a breath is wasted.
In Part II, “The Reagan Era Revisited: False Narratives of our Times,” he dives deeper into history and shows how events of the 1980s paved the way for the Republican-led bailouts of 2008. In the process, he debunks the GOP’s “nostalgic claim” that the current fiasco could be fixed somehow by returning to “undiluted Reaganism.”
It wasn’t supply-side dynamics but the 12-year Keynesian deficit-funded spending frenzy under Reagan and George H. W. Bush that created this “phony prosperity.” It left Republicans with the “insidious idea” that deficits don’t matter. And in 2008, there were no conservatives left “to safeguard the gates of the Treasury.” Instead, to goose growth, they focused on “tax cut gimmicks.”
The Reagan Revolution envisioned that the rising tide would lift all boats, based on market dynamics. In reality much of the growth in wealth over the last three decades originated in financial and real-estate bubbles caused by “profligate borrowing” of the government and “the money-printing spree” of the Fed. Despite the core tenet of the Reagan Revolution that the boundaries of the government should recede, the government became “ever more corpulent” even as the tax burden was reduced, and as household and businesses piled on debt. Hence the “deformation” of the Reagan Revolution.
In Chapter 5, “Triumph of the Warfare State: How the Budget Battle Was Lost,” Stockman recounts how, after large tax reductions had been put in place, the defense budget for 1982 suddenly was 50% larger than the number previously assumed. Stockman was “dumfounded” when he learned about “this calamitous result.” It was the beginning of a spending spree on conventional arms—tanks, helicopters, and the like—that had no relationship to the Soviet nuclear threat. After the Soviet Empire collapsed, it was clear that the only thing missing was a “plausible justification” for a conventional war. Thus, the Reagan Revolution, the “tribune of small government,” turned into the “great enabler of the 1980s warfare state revival.” It entailed “staggering waste and lamentable historical consequences.”
Then he slams the “Triumph of the Welfare State” and—whiplash—the “anti-tax religion” of the GOP, the “supply-side fantasy” that lower taxes and more growth would reduce deficits. Instead, deficits ballooned even during the phenomenal 1983-1990 Reagan-Bush recovery, proof that supply-side economics is a hoax. In the process, the Republicans’ taboo against chronic deficit financing in peacetime was jettisoned. So a push for higher outlays from liberals was met with a push for lower taxes from conservatives. They both had their way. Hence, today’s budget nightmare.
The root cause dates back to August 1971, the “Nixon abomination,” when President Nixon took the US off the gold standard, thus defaulting on the promise to redeem US debt in gold. It “paved the way for the eventual deformation of central banking” and “institutionalized monetization on a massive scale” that would allow the gigantic deficits of the 1980s to accumulate without dislocations. So, the Reagan Revolution wasn’t the apex of free market capitalism but a stepping stone to “the BlackBerry Panic of 2008.”
In Part III, “New Deal Legends and the Twilight of Sound Money,” Stockman, armed with a plethora of detail, debunks the current generation of “high priests of Keynesianism” who follow the presumed “sacred texts” of that era: the Bush and Obama administrations. They touted deficit spending as a solution to the “illusory depression bogyman” of the financial crisis.
But the New Deal created what would become monsters that played a prominent role in 2008, for example Fannie Mae that offered low-rate 30-year mortgages that were too risky for banks. So began the slippery slope of separating the mortgage origination process from owning and servicing the mortgage. It moved funding mortgages away from local banks and their deposits to global financial markets. And it gave rise to the “housing complex” with all its shenanigans that culminated in September 2008 with a $6 trillion bailout of the GSEs.
In Part IV, “The Age of Bubble Finance,” Stockman contends that taking the US off the gold standard created a “casino” attitude of finance that blew up in mid-October, 1987, when the market crashed. Instead of allowing the excesses to be purged, Greenspan, a proponent of free-market ideology, embarked on flooding the market with cash—even though the real economy was growing at a healthy clip. Since then, “meddling by financial officialdom” has become “standard operating procedure.” Greenspan had misunderstood the “most thunderous wakeup call in financial history” and ended up ignoring the “corrupting influence” of the printed money they were handing out.
The era of the “Greenspan put” had begun. It set the stage for future mayhem, including the concept of too big to fail. The Fed became “the speculator’s best friend.” Serial bubbles ensued, including stock market bubbles and the $11 trillion housing bubble, the “great housing deformation” that bloated Main Street consumption with borrowed money and brought real-estate speculation to neighborhoods.
Normally, the bursting of the Greenspan debt bubble would have been followed by a long deleveraging cycle to undo the “phony growth of the bubble years,” accompanied by downward pressure on consumer prices—a “modest reprieve” after forty years of inflation that whittled down the value of the dollar to 25 cents.
But Bernanke would have none of it. Instead, he played the “deflation card,” and everything below 2% inflation suddenly became deflation. He used “economic alchemy” to insist that higher inflation would somehow create jobs. Turns out, the “money printing spree was a dud” and resulted in the feeblest job creation in half a century.
Part V, “Sundown in America: The End of Free Markets and Democracy” is where presidential candidate Romney gets gored for his “fiscal dereliction” (i.e. defense and Social Security) and for his “complete failure” to see that free market capitalism had been “fatally corrupted” by the Fed’s coddling of Wall Street. The company he helped found, Bain Capital, an outgrowth of that Great Deformation, “garnered fabulous winnings through leveraged speculation” in markets that had been “perverted and deformed” by the Fed. And this experience, despite what Romney claimed, didn’t qualify him for the Oval Office.
Then the Obama administration gets gored for its sins, among them the “green energy extravaganza” and electric car boondoggle, and the bailouts of GM and Chrysler that didn’t save any jobs but “just reshuffled them from rising plants in right-to-work (red) states to dying plants in UAW (blue) states.” These bailouts were a “crushing blow to free market capitalism.”
Stockman spreads the blame for the auto bailouts: they were initiated by the “nation’s bailout crazed de facto president, Hank Paulson” and became a “bipartisan embrace.” Stockman argues that the free market would have provided debtor-in-possession loans, just as the government did, to take the automakers out of bankruptcy, though the interest rate would have been higher.
But on Main Street, the recovery was “utterly botched.” Instead of “breadwinner jobs,” we once again have “faux prosperity.” The Bernanke bubble is “an even sketchier version” of the Greenspan bubble, focused on the “deliberate and relentless reflation of financial asset prices.” The money-printing spree, a “gift” to Wall Street and the “1 percent,” ignited another round of rampant speculation and created a “wealth effect tonic that boosted spending at Nordstrom and Coach.” The wealth of the “1 percent” has recovered to the pre-crisis level, but successful Fed-driven speculation isn’t a sign of “honest economic recovery” but a “prelude to yet another spectacular meltdown.”
The Great Deformation is a hefty 700+ pages. Each chapter is divided into short blistering sections with intriguing titles, and it’s easy to read in small increments. The wealth of economic and political history is drawn together with constant focus on the financial crisis and its aftermath. We might not agree with every point and observation, and we might get antsy when Stockman slaughters one by one our sacred cows, but we enjoy following his analysis and his inner fire, his bitter logic, and his thoughts—while his language leaves us smiling so many times.
The Great Deformation is available at your favorite bookseller.