David A. Stockman: The Great Deformation


This book is absolutely, positively essential for anyone who’s even remotely interested in economics, finance or American history.

I’m going to go out on a limb and say that this is one of the most important political and economic books ever written.

Yes, it’s that good.

As a libertarian and as someone who’s worked in banking and finance my entire adult life, I’m accustomed to hearing antipathy toward Wall Street and the financial complex. After the 2008 collapse and bailout, I empathize with those who regard the system as predatory.

Unfortunately, the current state of affairs makes it difficult for those of us advocating for free markets to make the case for freedom when people generally perceive “free markets” not only to be the source of everything that caused the collapse, but pretty much anything else that adversely affects humanity. From climate change to racism to income inequality to rape, capitalism gets the finger of blame for every malady that plagues society. Since the time Marx enshrined whinging about the bourgeoisie as a virtuous guiding principle, the very notion of “capitalism” has become freighted with increasingly negative connotations.  

Well, socialists, Occupiers and capitalism haters everywhere, it’s time to set the record straight. David Stockman has laid down a devastating and record settling case against the mutant strain of state capitalism that is infecting the world today.

If you are really interested in learning about how the state corporate financial complex came to be the reviled beast that it is, this is the book to read. Put down Piketty and open your mind, because Stockman lays down a century’s worth of narrative busting truth in this book.

From the New Deal up to the housing collapse of 2008, Stockman dissects and disassembles one narrative after another in painstaking detail. No administration or monetary authority is spared.

In opposition to virtually all of the received wisdom, Stockman takes FDR’s New Deal out for a thorough demolition. From the Thomas Amendment’s destruction of hard currency to the ad hoc grab bag of bureaucratic agencies which bloated the administrative state to the origins of farm belt cronyism, no doubt remains that FDR’s true legacy is “the patron saint of crony capitalism.”

A final attempt at fiscal and monetary restraint was achieved in the Eisenhower administration. Between Ike’s budget discipline and the steady hand of Fed Chairman William McChesney Martin, the “old time fiscal religion” that now lives as GOP rhetoric more than reality was an actual phenomenon for a couple short years.

It proved to be a short lived victory. The Kennedy administration was the beginning of the end of fiscal and monetary restraint. After an initial promise to maintain the stability of the price of gold and the convertibility of the dollar under the Bretton Woods framework, Kennedy eventually succumbed to the ascendant gospel of Keynesian “full employment” budgets and tax cuts paid for on federal credit.

After the JFK administration’s capitulation to Keynesian dogma and the combined profligacy Johnson’s domestic spending expansion and war largesse, America’s fiscal house took a turn towards permanent deformation.

The only person whose legacy receives an even more punishing rebuke than FDR is Tricky Dick Nixon. Richard Milhous Nixon was solely responsible for the complete and total degeneration of American fiscal and monetary discipline. Between price and wage controls and the closing of the gold window, Nixon all but assured the rise of a permanent regime of statist economics. Financial markets would be the province of debt fueled speculation and bubble finance while giving rise to budget deficits without pain. The most eye opening of Stockman’s Nixon era claims are twofold: the silent destruction of Glass-Steagall through floating the dollar and the flagrant error of indexing Social Security to inflation in 1972.

Sadly, the progenitor of this deformation is none other than Milton Friedman. Starting with his misdiagnosis of the Great Depression, the flawed theory of a controlled expansion of the money supply took root amongst the political class. From this deeply flawed thesis, the FOMC committee transformed into an unelected politburo of central economic planning which heavily favored the financial class over the real economy.

It is supremely ironic that one of the 20th century’s greatest libertarian intellectuals laid the foundation for what Stockman argues is the mother of all deformations: central economic planning by fiat currency. A form of socialism that is perhaps more insidious than the more overt manifestation since its effects are invisible to most citizens and the blame ends up being assigned to capitalism itself.

From this single act of ultimate political hubris and ignorance, the Pandora’s Box of financial engineering was unleashed.

He delves into the history of Leo Melamed, the Chicago Mercantile Exchange, and the rise of currency and T-Bill futures; innovations that carried an aura of free market ingenuity, but ushered in a new era of speculative finance which added nothing to the real task of capital formation or job creation. Once the world shifted to a regime of floating currency, the genie was out of the bottle. Central bankers were in a perpetual battle with market forces that were made volatile by their own policy decisions. Exchange rates were subject to wild and unpredictable fluctuations, central bankers stumbled and bumbled through phenomena they could never truly manage while Wall Street gorged on the elixirs of leverage and easy credit.

Despite Paul Volcker’s final attempt to restore a semblance of sound monetary policy, Alan Greenspan abandoned his Objectivist roots and embraced the power of the Federal Reserve to propel stock prices and speculation. Between the Keynesian defense buildup and loose monetary policy enabled by the Greenspan Fed, the mythology of pain free deficit driven prosperity which ultimately defined the Reagan era was enshrined.

By the end of the Reagan era, the three dogmas of statist economics, Keynesianism, supply-side and monetarism, were accorded unquestioned deference.

From these central deformations, Stockman skillfully traces the ascent of the Wall Street financial complex that we have come to know.  Originating at the at the Salomon Brothers trading desks, the model of “long and leveraged” became the template that would be replicated in every investment bank on Wall Street.

While I empathize with those who regard our brand of state capitalism with cynicism and contempt, I genuinely hope that skeptics and cynics will take the time to read this book to understand that the myth of casino style easy money from the stock market is a phenomenon made possible because of central bankers.

Stockman addresses three phenomena of contemporary finance that should be of interest to progressives or anyone who regards the outsize gains of the Wall Street complex with suspicion or disdain: the hedge fund and private equity complex, the entire panoply of leveraged speculation on which it’s built, and financial bubbles which feed them.

In all three cases, Stockman argues that the Greenspan/Bernanke Put, the Fed’s implicit guarantee of lowering the funds rate into negative yield if stock prices dip below a certain threshold, is the lynchpin behind an entire host of speculative deformations.  Primary among these  phenomena are stock buybacks, M&A, and LBO’S.

The phenomenon that may hold the greatest interest to people is Stockman’s detailed but imminently readable analysis of the housing bubble. Contrary to the standard wisdom, this was not in any way a natural phenomenon of the free market. Warehouse credit lines, GSE’s, a legislative agenda and an accommodating Fed all conspired to create a speculative feeding frenzy which met an inevitable unhappy ending.

Perhaps the most provocative claim is his argument that the 2008 collapse was an artificially ginned up panic that was confined to Wall Street and should have run its course. Even more provocative is his claim that AIG did not need a bailout. It’s radical shit and it flies in the face of virtually all conventional wisdom, but his case is very persuasively argued.

The so-called green energy “investments” of the Obama administration are hauled out into the daylight for a righteous thrashing.  Little did I know that even America’s Tony Stark, Elon Musk, fed at the government trough.  The colossal waste of Solyndra debacle is laid bare in fair detail and the elitist hubris behind it will make your blood boil.  I’m completely in favor of the evolution of new technology, but the insistence on government support has turned this effort into yet another denomination in the Cult of the State which has little regard for whether the Green Revolution reality is anywhere near the rhetoric.

Stockman rounds out the book with a tour through the various failures and deformations of the market and the sycophants, parasites and opportunists who profited from them. This cesspool of corruption was made possible because of the abandonment of fiscal and monetary discipline and made worse by a class of political hacks who shamelessly feed off peddling the delusion of a free lunch. Among these deformations and predators are the subprime auto loan complex, the crony capitalist parasites who feed at the federal trough, the unsustainable welfare state, and the swarm of vulture capitalists who gorge on state-enabled windfall profits.

Stylistically speaking, Stockman is biting and acerbic throughout. My kind of guy. The sobering bluntness of his message is leavened by some healthy sarcasm and contempt.

The book is chock full of meme-worthy quotes and turns of phrase that can only be described as Stockmanisms.  For example:

Full-Retard Antediluvian: The Forgotten Standard of Honest Public Finance

And many, many more.

He’s a bit repetitive, but I don’t begrudge him on this point because I feel that it ultimately gives an accretive power to the core themes.

Make no mistake, Stockman’s prognosis for the state is bleak. This is a pessimistic view of the deterioration of public finance in the years to come.  Stockman predicts an unpleasant day of reckoning for all of us.

This doesn’t mean that he’s unwilling to proffer solutions. He has many, but they’re so radical that he admits their inherent impossibility in the current political climate right off the bat.

Stockman’s programme for reform is similar to the one proffered by Ron Paul; a radical separation of market and state, a full throated call for a rollback of the warfare/welfare state, and a return to sound money.

Though I applaud his sincere attempt to lay out a course of action, my concern (aside from the fact that it’s a form of political suicide in and of itself) is the same one that lies at the heart of all minarchist arguments. Even if this agenda were to be fulfilled, what would prevent the state from engaging in monetary and fiscal profligacy recidivism?

Regardless, this book is nothing short of a tour de force.  It has my highest recommendation.

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