The Great Deformation:
The Corruption of Capitalism in America
David A. Stockman

Reviewed by T. Nelson

In the mortgage crash of 2008, only those who viewed their houses as a place to live in (that is to say, ordinary people) lost money on their homes. Those who saw a house as a mere investment did what I jokingly told my friends to do: sell your house at the peak, rent for a while, then buy it back cheap.

That's what you have to do these days. Thanks to the government, we are all Wall Street bankers now. David Stockman, who was the director of the Office of Management and Budget under Ronald Reagan, says that if the government had adhered to its own principles of sound economics the 2008 financial panic would never have happened. The crash was triggered by the impending bankruptcy of Goldman Sachs and Morgan Stanley, which had been playing too many games with money. Bankruptcy was a natural and healthy development—just desserts for their speculative financial practices. But instead of letting them fail and purge the system of junk investments, Hank Paulson and Ben Bernanke panicked and demanded a 700 billion dollar blank check of taxpayer money to bail out their pals, claiming that the economy was about to be consumed in a fiery Armageddon. Stockman calls this the culmination of decades of crony capitalism: the corruption of capitalism by bad government.

Stockman says that Paulson's claim of Great Depression 2.0 being at hand was essentially a big, fat lie (although he doesn't use that word), as were Bush's and Obama's claims to have forestalled an economic crash. True enough. But politics played a major role for both presidents. The 2008 elections were a month away. Bush knew an Obama presidency would be a disaster, so he let the Paulson trope trip him into the TARP trap. And Obama never cared much for capitalism to start with.

Stockman writes passionately about this stuff. He comes across as one of those people who gets excited while paying their taxes. We get the impression that things like risk-intolerant prime fund investors and corporate divestiture deals keep him awake at night.

Sleep deprivation may explain the impression that some parts of this book give of having been banged out over a couple of months at three in the morning. Stockman says the 2008 crash was fake, then he says it was a disaster caused by deficit spending under Reagan—even though spending as a percentage of GDP was virtually the same under Reagan as under Carter and Johnson. Then he gives Obama, the biggest spender of all time, almost a free pass. He repeats his theme about GD 2.0 not being imminent at least twenty times in the first 50 pages. All in all it takes him 718 exhausting pages, not counting the index, to say what could have been written in 300. But his goal is to pound his points in with repetition, historical detail, and personal experience.

Stockman excoriates the Republicans for abandoning their conservatism, starting with Nixon for taking the dollar off gold at Bretton Woods. That was necessary by Washington's unwillingness to do what was needed to maintain a budget surplus. But unhitching from gold started this whole shebang about fiat currency and the myth that deficits don't matter. Because the government used phony statistics dreamed up in the '30s by Keynesians which count government spending and borrowed money toward the GDP, these big spenders of fake fiat money could claim to have boosted GDP. Yet as our economy rotted away, most kept saying the fundamentals were “strong.”

But the biggest villain in this story is the Fed. Stockman calls it a rogue central bank, whose free money policies amount to little more than blowing bubbles. The Fed's job was to curtail domestic demand to kill the trade deficit. Instead it threw a “debt party.” Under Greenspan, debt grew 6.5 times faster than GDP, and the deflationary pressure from Chinese imports, which kept inflation low, accelerated.

Stockman provides a masterful description of the GD 1.0. He calls FDR's New Deal a political gong show. The GD was not caused by a collapse of domestic demand, says Stockman, but by the collapse of debt-financed foreign consumption of American exports, which set off a frenzy of protectionism. Smoot-Hawley was proof of this. But in 1933 FDR turned what should have been a brief contraction into a catastrophe. Stockman says it was wartime savings, not wartime deficit spending, not FDR, and certainly not Keynesianism, that pulled us out of the Depression.

However, Stockman overestimates the power of the presidency. For example, he says the Republican government under G.W. Bush essentially nationalized the entire commercial paper market by taking control of Freddie Mac.

Yet we all know in those days Congress was firmly in the hands of the Democrats, and it was they, not Bush, who had pressured banks to issue subprime mortgages as a way of increasing home ownership among minorities. Bush tried several times to rein in Fannie Mae, but was unable to get past Congress. By 2007 HUD had decreed that 55% of Freddie and Fannie's mortgages be given to borrowers below the median income in their communities. The only way this could happen is with subprimes. Thus, the Democratic congress, not Wall Street greed, and not Bush, caused the 2008 crash. On this point Stockman is silent.

But Democrats aren't really getting a free pass here. Stockman mostly ignores them because he assumes they just want to tax and spend. He criticizes the Republicans because he had higher expectations of them. To Stockman, Democrats might as well be from Neptune. Republicans believed in fiscal rectitude, and they should have known better. Of all the presidents, Stockman has the highest praise for Eisenhower.

So, what about the future, then? Stockman has no solution, other than to say the “wrecking ball of the Keynesian state” can only get worse. He's not thrilled with Milton Friedman's theories, either—in fact, he seems skeptical of all academics. Stockman's worst insult is to call someone a “learned professor.” Greenspan followed the learned Professor Krugman's advice, he says, which left the middle class in ruins and kept speculators in business and debt zombies solvent.

If the so-called Occupiers cared to understand the truth, they would have called for Krugman's head and burned Alan Greenspan in effigy. ‘Being greedy’ may be the first line of any Wall Street banker's CV, but Wall Street is only a river flowing along the contours laid out for it by the Fed.

We still need academics and their theories because the alternative is to rely on guesswork and experience. Wisdom in government is what Stockman is arguing for, but it's unattainable, because for every Stockman there are a hundred Greenspans who have to make a hundred catastrophic mistakes before they reach Stockman's plane of enlightenment. Theories are a way of encapsulating wisdom, so those painful lessons can be avoided. Even fools politicians can get good results from a good theory, if they apply it properly.

That has been the pattern: government intervenes in the economy, creates a disaster by rewarding bad behavior, then blames it on “free markets” to justify even more intervention. We saw this before in Japan. If this were a science fiction movie, we'd get up and leave: this is where we came in. But unfortunately for us, it's not a movie. Godzilla is real, and he is Washington, D.C.

jan 26, 2014; updated feb 02, 2014