Few will study it, what a shame..
Reviewed in the United States on 03-31-2014
The Great Deformation—
The Corruption of Capitalism in America
By David A. Stockman
10/31/2013
A Book Review
by John C. Vaughan, Ph.D.
Stockman’s book is a 752 page New York Times Best Seller for 2013, but because of its length with no graphs or figures, very few people will study it, including those that bought it! What a shame, because this well-respected individual who has seen it all has some very important things to say. This book review is my effort to understand Stockman’s remarkable writing. As I type this there are already 216 book reviews posted at Amazon, including by some who admit they have only read 50% of the book!
In September 2008 when the Bush White House, Federal Reserve Chairman Ben Bernanke, and Treasury Secretary Hank Paulson started screaming that the country was lost unless we started printing money like never before, I was shocked. I spent the next full year trying to get answers as to what was really happening. I personally asked 30 very smart, well-connected, financially successful friends in every sort of business, government, financial, and academic field I could think of. None of them gave me a satisfactory explanation of what was happening. Clearly things were not going well in this country and I felt individuals were powerless to do anything except start becoming more proactive for themselves and their families. I posted some of my friends’ personal insights at www.pvbv.com, and I concluded that people should start working towards an ongoing income.
Then I read Stockman’s book. It is a searing look at Washington and probably the best explanation of where our country is at, and how we got here. It is a 40 year story with 20 economic policy heroes and 21 policy villains, but the villains won. A Keynesian state-wreck is at hand. In his last chapter he describes how we might survive; the solutions are difficult and the possibility of our country doing them are very slim. The good parts of capitalism have been deformed beyond belief by the “governing class” in Washington, consisting of leaders in both parties.
To get a flavor for his message, here are some of David’s words in chronological order as he jumps around in history to write his 26 Chapters organized into 4 parts, followed by his concluding 8 chapters in Part V - - Sundown in America: The end of free markets and democracy.
Introduction
In truth, the fiscal cliff is permanent and insurmountable. It stands at the edge of a $20 trillion abyss of deficits over the next decade. And this estimation is conservative, based on sober economic assumptions and the dug-in tax and spending positions of the two parties, both powerfully abetted by lobbies and special interests which fight for every paragraph of loophole ridden tax code and each line of a grossly bloated budget.
When Fed chairman Bernanke began running around Washington shouting that the Great Depression 2.0 was at hand, I smelled a rat.
Then, when the Fed’s fire hoses started spraying an alphabet soup of liquidity injections in every direction, and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street, and that the threat of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.
At length, the sweaty visage of Treasury Secretary Hank Paulson appeared on the TV screen yet again, this time announcing that Washington was writing a $13 billion check to bail out General Motors. That’s where I lost it.
Paulson’s claim that the auto industry would disappear and that millions of jobs would be lost I knew to be laughable.
PART I
THE BLACKBERRY PANIC OF 2008
Chapter 1. PAULSON’S FOLLY - - The Needless Rescue of AIG and Wall Street.
A handful of panic-stricken top officials, led by treasury secretary Hank Paulson and Fed chairman Ben Bernanke, proclaimed that the financial system had been stricken by a deadly “contagion” that had come out of nowhere and threatened a chain reaction of financial failures that would end in cataclysm. That proposition was completely false, but it gave rise to a fateful injunction – namely, that all the normal rules of free market capitalism and fiscal prudence needed to be suspended so that unprecedented and unlimited public resources could be poured into the rescue of Wall Street’s floundering behemoths.
The turmoil triggered in global financial markets by the Russian default in August 1998 took the stock averages down by nearly 20 percent in a matter of weeks. However, the Greenspan Fed nullified this 1998 market correction entirely by a burst of money printing and a sharp reduction in interest rates. This financial safety net became known as the “Greenspan Put”, a financial régime in which the stock market averages reflect expected monetary juice from the central bank, not anticipated growth of profits from free market enterprises.
Between early 2002 and mid-2005, the Fed aggressively rolled out the welcome wagon for speculators, driving inflation-adjusted interested rates in the United States to patently absurd levels. The Fed was thus running an out-and out bubble machine, bloating the American economy with more cheap debt than ever before imagined.
Chapter 2. FALSE LEGENDS OF DARK ATMs AND FAILING BANKS
In fact, after Congress courageously voted down the first TARP bill, the orchestrators of the bailout, Chairman Bernanke and Secretary Paulson, cynically deployed these payments freeze horror stories to spook congressmen and other policymakers into falling in line.
Yet nothing like the financial nuclear meltdown alleged by Washington officialdom ever occurred or threatened.
Chapter 3. DAYS OF CRONY CAPITALIST PLUNDER
Supply-side tax cutting became the Keynesian opiate of the prosperous classes. But what made this unholy union possible was the Great Deformation of central banking, money and credit which was initiated by FDR but had been crystallized by Nixon’s Camp David abomination of August 1971.
PART II
THE REAGAN ERA REVISITED: FALSE NARRATIVES OF OUR TIMES
Chapter 4. THE REAGAN REVOLUTION: Repudiations and Deformations
The rising tide envisioned by the Reagan Revolution was based on the expected societal gain from free market capitalism and the sustainable increases in productivity, output, and real wealth which it generates. In a healthy capitalist economy income distribution reflects the economic justice of the market place, not the political engineering of the state, and properly so.
Chapter 5. TRIUMPH OF THE WARFARE STATE: How the Budget Battle Was Lost
By contrast, Eisenhower held the old-fashioned view that military spending is inherently wasteful. It consumes resources that would otherwise be available to meet the needs of the civilian economy.
Indeed, in a supreme irony, Reagan’s short-lived challenge to the welfare state in early 1981 was quickly supplanted by its opposite: a rapidly swelling warfare state that was both unnecessary at the time and destined to become an incubator of imperialist calamity in the decades ahead.
Chapter 6. TRIUMPH OF THE WELFARE STATE: How the GOP Anti-Tax Religion Was Born
The Reagan-era fiscal legacy was, in fact, a permanent policy of massive deficit finance. The destructive consequences of it were not eliminated, but only deferred by the furious central bank buying of Treasury bonds over the next twenty-five years.
Truman could pay Uncle Sam’s bills on 16 percent of GDP because the Cold War defense buildup had not yet happened, most retirees were not yet eligible to collect Social Security, and LBJ’s massive Great Society was not even imagined.
Chapter 7. WHY THE CHICKENS DIDN’T COME HOME TO ROOST: The Nixon Abomination of August 1971
One of the more cogent alarms came from conservative economist Henry Hazlitt, who titled his March 1969 Newsweek column “The Coming Monetary Collapse.”
Hazlitt publicly warned the White House that “one of these days the United States will be openly forced to refuse to pay out any more of its gold at $35 an ounce.”
Hazlitt could not have been more clairvoyant. The postwar monetary order was at a crucial inflection point. It would soon lurch into a forty-year spree of global debt creation, financial speculation, and massive economic imbalance – yet Nixon refused to even read the briefing papers.
PART III
NEW DEAL LEGENDS AND THE TWILIGHT OF SOUND MONEY
Chapter 8. NEW DEAL MYTHS OF RECOVERY
FDR’s single-handed sabotage of the London conference was one bookend of a thirty-eight-year epoch. The other end was bounded by Richard Nixon’s equally impudent destruction of Bretton Woods in August 1971.
In each case the modus operandi was the same. Both Roosevelt and Nixon were aggressive politicians who lacked any enduring convictions about economic policy. Neither had any compunction at all, however, about using the taxing, spending, regulatory, and money-printing powers of the state to achieve their domestic political and electoral objectives. In the great scheme of modern financial history FDR and Tricky Dick were peas in a statist pod.
Chapter 9. NEW DEAL’S TRUE LEGACY: Crony Capitalism and Fiscal Demise
Policy measures like Fannie Mae, deposit insurance, social insurance, the Wagner Act, the farm programs, and monetary activism share a common disability. They fail to recognize that the state bears an inherent flaw that dwarfs the imperfections purported to afflict the free market; namely, that policies undertaken in the name of the public good inexorably become captured by special interests, and crony capitalists who appropriate resources from society’s commons for their own private ends.
The fiscal cost of relentless universal benefit expansion has driven an epic increase in the payroll tax. The initial 1937 payroll tax rate was about 2 percent of wages. The current punishing payroll tax of 16% is actually way too low – that is, it drastically underfunds future benefits owing to positively fictional rates of economic growth assumed in the 75-year actuarial projections. As a result, the benefit structure grinds forward on automatic pilot facing no political opposition whatsoever. In the meanwhile, the fast approaching day of reckoning is thinly disguised by trust fund accounting fictions.
At the end of the day the nation’s fiscal demise was enabled by the Thomas Amendment’s destruction of the gold dollar. Now it was only a matter of time before Professor Friedman would provide Richard Nixon with the rationale to finish the job FDR had started.
Chapter 10. WAR FINANCE AND THE TWILIGHT OF SOUND MONEY
But when the peace came in 1945, the victory of these warfare state-inspired policy tools was neither complete nor immediate. Indeed, over the next quarter century the canons of financial orthodoxy found intermittent, and sometimes poignant, expression under Presidents Harry Truman and Dwight D. Eisenhower, and the long-reigning Fed chairman William McChesney Martin. Even President John F. Kennedy kept orthodoxy alive, at least in the Treasury Department and its international dollar policies.
So the road from Pearl Harbor to Richard Nixon’s decision to default on the nation’s Bretton Woods obligation to redeem its debts in gold, eventually ushering in printing-press money and giant fiscal deficits, is important to retrace.
Chapter 11. EISENHOWER’S DEFENSE MINIMUM AND THE LAST AGE OF FISCAL RECTITUDE
Ike was a military war hero who hated war. He was also the former supreme commander of the costliest military campaign in history and revered balanced budgets. Accordingly, Eisenhower did not hesitate to wield the budgetary knife, and when he did the blade came down squarely on the Pentagon.
The essence of Eisenhower’s immense fiscal achievement, an actual shrinkage of the federal budget in real terms during his eight-year term, is that he tamed the warfare state.
In the final analysis, Eisenhower’s fiscal record is one of a kind. Between fiscal 1953 and 1961, total federal spending declined from 20.4 percent of GDP to 18.4 percent.
Chapter 12. THE AMERICAN EMPIRE AND THE END OF SOUND MONEY
But in the end, it was the economic nationalist from the University of Chicago, the closet disciples of Keynes, who found the discipline of the gold exchange system to be as inconvenient in 1971 as he had found it in 1931. So the disciples of Friedman recommended to the president of the United States that the world’s richest nation default on its debt obligations, an act so perfidious that even J. M. Keynes himself might have abjured.
Secretary Dillon’s initiatives to defend Bretton Woods also had an advantage that would never again recur; namely, a Fed chairman who believed in sound money, fixed exchange rates, and meeting the nation’s international obligation to keep the dollar good as gold.
Yet in a sure fire sign of trouble to come, Time magazine put Keynes on its year-end 1965 cover and pronounced that the business cycle had been abolished. According to the editors, policy makers had “discovered the secret of steady, stable, no-inflationary growth.”
Chapter 13. MILTON FRIEDMAN’S FOLLY: Rise of the T-Bill Standard
The great irony, then is that Milton Friedman, the nation’s most famous modern conservative economist, became the father of Big Government, chronic deficits, and national fiscal bankruptcy.
The decision to destroy Bretton Woods and float the dollar also caused an irreparable breakdown of international financial discipline. Never again were trade accounts between nations properly settled, and most especially in the case of the United States.
By the end of 2012, however, the facts were unassailable. After three decades of “deficits don’t matter” fiscal policy, the nation’s publicly held debt amounted to $11.5 trillion.
It could be truly said, therefore, that the world’s central banks have morphed into a global chain of monetary roach motels. The bonds went in, but they never came out. Nearly 50 percent had been sequestered in the vaults of central banks. And therein lays the secret of “deficits without tears.”
PART IV
THE AGE OF BUBBLE FINANCE
Chapter 14. PORK BELLIES, FLOATING MONEY, AND THE RISE OF SPECULATIVE FINANCE
The four decades since Camp David also show that the Friedmanite régime of floating money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of credit to income in the system, causing the daisy chains of debt upon debt to become ever more distended and fragile.
At the same time, the Fed’s maneuvers in the financial markets have become increasingly more blatant, massive, incessant, and desperate.
Chapter 15. GREENSPAN 2.0
In short, the dot-com bust was the last chance for the Fed to pivot and liberate the American economy from the corrosive financialization it had fostered. A determined policy of higher interest rates and renunciation of the Greenspan Put would have paved the way for a return to current account balance, sharply increased domestic savings, the elevation of investment over consumption, and a restoration of financial discipline in both public and private life.
Needless to say, the Fed never even considered this historic opportunity. Instead, it chose to double-down on the colossal failure it had already produced, driving interest rates into the sub-basement of historic experience. This inexorably triggered the next and most destructive bubble ever.
Chapter 16. BULL MARKET CULTURE AND THE DELUSION OF QUICK RICHES
The historic laws of sound finance were mocked by the nation’s central bank: households would grow steadily richer, even as they enjoyed the luxury of borrowing and consuming at rates far higher than the sustainable capacity of their incomes. The bull market culture had now totally deformed the free market.
Chapter 17. SERIAL BUBBLES
During the twelve years of the Greenspan stock market mania for example, the value of stocks and mutual funds held by households grew at a 17.5 percent compound rate compared to an average nominal GDP growth rate of only 5.7 percent. Obviously, the implication that stock market wealth can grow permanently at three times the rate of national output growth is not plausible.
The root of Bernanke’s staggering monetary deformation is that in the years since October 1987 the nation’s central bank has effectively destroyed the free market in interest rates.
Chapter 18. THE GREAT DEFORMATION OF CAPITAL MARKETS: How Wall Street Got Huge
The collapse of three separate $5 trillion financial bubbles in less than a decade attested to the deeply impaired condition of the nation’s capital markets. There is actually an even greater deformation lurking beneath these wild rides; namely, the aberrant journey of the giant government bond market which forms the foundation of Wall Street and drives the financial rhythms by which it operates.
It instilled in Wall Street the utterly false lesson that fortunes can be made in the carry trade, an illusion that is possible only when the Treasury bond price keeps rising, rising, and rising. Yet under a régime of sound money it is not possible for public debt to appreciate for long stretches of time, and most certainly not for thirty years.
Chapter 19. FROM WASHINGTON TO WALL STREET: Roots of the Great Housing Deformation
In 1970, home mortgage lending had been a healthy, vibrant industry financing the rise of the American middle class. Twenty years after Camp David, the home lending business was fatally impaired, just as Washington launched its misbegotten crusade for increased home ownership.
Chapter 20. HOW THE FED BROUGHT THE GAMBLING MANIA TO AMERICA’S NEIGHBORHOODS
Widespread home equity extraction through borrowing would have horrified sound money men only a few decades earlier. But the Fed’s debt-pusher-in-chief urged that there was no cause for alarm about the massive raid on home ATMs being triggered by rising housing prices and easy mortgage credit. Indeed, by issuing a “do not be troubled” advisory, the future Fed chairman proved he didn’t know the difference between honest GDP growth earned by labor and productivity and a “higher print” reflecting speculative borrowing.
Chapter 21. THE GREAT FINANCIAL ENGINEERING BINGE
The end result was a vicious financial bubble that exploded from its inner tensions and instabilities in September 2008. Yet the Fed couldn’t explain why the Wall Street meltdown happened owing to a singular reality: the stock market had been propped up all along by a financial engineering binge that had been enabled by the Fed’s own policies.
Chapter 22. THE GREAT RAID ON CORPORATE CASH
Not surprisingly, the Fed’s meeting minutes from 2007 do not evince even a bit of worry that the surging stock market averages were being “bought” by means of massive cash and equity extraction from the balance sheets of American business.
Chapter 23. THE RANT THAT SHOOK THE ECCLES BUILDING: How the Fed Got Cramer’d
The frenetic rate cutting cycle which ensued in the fall of 2007 was a virtual reenactment of the Fed’s easing panics of 2001, 1998, and 1987. As in those episodes, the stock market had again become drastically overvalued relative to the economic and profit fundamentals. But rather than permit a long overdue market correction, the monetary central planners began once more to use all the firepower at their disposal to block it.
Chapter 24. WHEN GIANT LBOs STRIP-MINED THE LAND
Financial engineering is the mother’s milk of speculative capital. Big hedge funds which can move money with massive throw weight and lightening speed thrive on it. It is a prolific generator of the exact kind of market moving events - rumors and announcements of buyouts, takeovers, and buybacks – that generate windfall gains largely unrelated to company fundamentals.
In the process, the accumulated equity of American business was strip-mined and transferred mainly to the top 1 percent; that is, to the preponderant owners of hedge fund capital.
When the Fed caused interest rates to tumble to lows not seen for generations, the market for leveraged finance literally exploded.
After five to seven years virtually none of this debt has been paid down in the manner of the classic LBO model.
Chapter 25. DEALS GONE WILD: Rise of the Debt Zombies
When Bernanke slashed interest rates to nearly zero; it triggered a Wall Street scramble for “yield” products to peddle to desperate investors.
Artificially cheap debt causes profound distortions, dislocations, and malinvestments as it wends its way through the real economy.
Undoubtedly, the monetary politburo had visions that its ultralow interest rate régime would spur investment in plant and equipment or IT system upgrades. In fact, it was supplying high octane fuel for financial engineering – a signal to corporate executives to grow their asset base the easy way – that is, on the floor of the New York Stock Exchange.
In truth, a crash landing has been prevented so far only because billions of LBO debt has been subjected to “extend and pretend.”
Now Bernanke adds insult to injury through maniacal adherence to money-printing policies which inflate the middle class’s cost of living and demolish its rewards for thrift in order to keep leveraged speculators in business and the debt zombies solvent.
Chapter 26. BONFIRES OF DEBT AND THE ROAD NOT TAKEN
Drastically overpriced debt is eventually smacked with painful losses on the free market, but not on a Wall Street served by compliant central bankers. When the Bernanke Fed bailed out Bear Stearns in March 2008, for example, it was sitting on tens of billions of impaired or worthless assets.
By staying out of the Treasury market the Fed would have permitted short-term interest rates to soar, thereby laying low the financial meth labs all along Wall Street.
After the Lehman event, the madcap money printing of the Bernanke Fed and the bailout frenzy of the Paulson Treasury Department stopped the Wall Street cleansing in its tracks.
The Bernanke Put was far more insidious than the Greenspan Put because it refused to permit even a 10 percent correction in the stock averages before pumping a new round of juice into Wall Street.
Bernanke is the godfather of debt zombies. His radical interest rate repression campaign has not created much new lending, but it has disabled and overridden the free market’s capacity to liquidate bubble-era credit.
The low interest rates on bubble-era debt are laughable by all historic standards. Banks should be reserving heavily against the maturity cliffs ahead, but are not being required to do so owing to the utter folly emanating from the Eccles Building; namely, the Fed’s fatuous promise that one day it will be able to “normalize” interest rates without triggering a debt-impairing conflagration on Wall Street and another plunge on Main Street.
PART V
SUNDOWN IN AMERICA:
THE END OF FREE MARKETS AND DEMOCRACY
Chapter 27. WILLARD M. ROMNEY AND THE TRUMAN SHOW OF BUBBLE FINANCE
The 2012 Presidential election signaled the onset of sundown in America, and not merely because an avowed big-spending statist won the race. Rather, it’s because the Republican candidate proved in words and lifelong deeds that there is no conservative party left in America – at least not one that is willing or able to defend sound money, free markets, and fiscal rectitude.
So by their silence on the Fed and their defense of failed free lunch fiscal policies, the Romney-Ryan ticket failed to give the electorate a credible reason to abandon an incumbent who drank his Keynesian Kool-Aid straight up. Under the second Obama administration, therefore, big deficits and massive money printing will occur as a matter of policy choice.
Chapter 28. BONFIRES OF FOLLY: Bernanke’s False Depression Call and the $800 Billion Obama Stimulus
Professor Ben Bernanke was a doctrinaire academic who “knew” what was happening in 2008. Except what he knew was dead wrong. So in becoming yoked to Bernanke’s calamitous error the nation was victim of a terrible fluke.
The threat of the Great Depression 2.0, and the madcap doubling of the Fed’s balance sheet from $900 billion to $1.8 trillion during the next seven weeks, got interjected into the discourse only because Bernanke claimed to be a scholar of those seminal events.
Within nine months, the empirical data would prove that what was actually happening on September 15 didn’t remotely resemble the circumstances after the 1929 crash, and that the idea the nation was threatened by the Great Depression 2.0 was specious nonsense. But by then it was too late. Even if the evidence could have been properly interpreted, the nation’s political system had already gone off its rails.
The danger to free markets and political democracy was overwhelming.
I had been part of a new administration that moved way too fast on a grand plan, but the Reagan-era fiscal mishap didn’t even remotely compare to the reckless, unspeakable folly represented by the Obama stimulus plan. In exactly twenty-two days from the inauguration, the new administration conceived, drafted, circulated, legislated, and signed into law an $800 billion omnibus package of spending and tax cutting that amounted to nearly 6 percent of GDP.
But the package was not a rational economic plan; it was a fiscal Noah’s ark which had welcomed aboard every single pet project of any organization in the nation’s capital with a K Street address.
The giant Obama stimulus, therefore, amounted to a naked exercise in borrowing from the future on Uncle Sam’s credit card to artificially inflate current spending and income. There was no permanent national wealth gain at all, just a higher mortgage of taxes on future generations.
The fiscal fundamentals inherited by the Obama White House were actually far worse than they appeared to be. In fact, the massive red ink from the Bush administration’s unfinanced wars and tax cuts was only the visible layer of fiscal decay; lurking down below were Dick Chaney’s hidden deficits temporarily obscured by the second Greenspan bubble. So the new administration was starting in a much deeper fiscal hole than it imagined, and within two weeks was frantically and recklessly digging itself in deeper.
Chapter 29. OBAMA’S GREEN ENERGY CAPERS: Crony Capitalist Larceny
The Obama administration’s first twenty-two days contained upward of $60 billion for green energy. Yet every dime involved an unnecessary and inappropriate fleecing of American taxpayers.
Yet if reduced gasoline consumption is the policy objective, a European scale fuel tax, say, $4 per gallon would cut US consumption by upward of 3 million barrels per day, or about 35 percent.
In truth, with today’s E-Z Pass technology all significant highways, interchanges, secondary roads, and bridges could be funded with user charges.
From an economic equity viewpoint, the argument for federal funding of regional light rail is especially perverse. Most of it would be built in the highest income regions of the United States – California and the Eastern Seaboard – and paid for by taxpayers in the lower income and less densely populated interior.
The nation’s so-called progressive party cannot see that the overwhelming task of national governance for years to come will be tending and funding the safety net.
Since the official end of the recession in June 2009 there have been 3.5 million new cases on the Social Security disability benefits rolls, a figure which towers over the 200,000 breadwinner jobs restored during that period, and which is nearly double the caseload growth rate prior to the crisis. In short, the disability benefit has become a backdoor safety net, and in the process is encouraging millions of desperate citizens to abuse the program and become permanent dependents of the state.
Chapter 30. THE END OF FREE MARKETS: The Rampages of Crony Capitalism in the Auto Belt
The bailout of Chrysler and General Motors (GM) was utterly unnecessary and did not save any auto jobs: it just reshuffled them from rising plants in right-to-work (red) states to dying plants in the UAW (blue) states. They were, in fact, the final crushing blow to free market capitalism.
It was a Republican administration which led the bailout bandwagon, thereby leaving the public purse vulnerable to crony capitalist raids for the permanent future.
The auto bailout was initiated by the nation’s bailout crazed de facto president, Hank Paulson.
GM was insolvent precisely because it had accumulated too many fixed contractual obligations – the very thing bankruptcy was designed to alleviate.
The “bailout” was really about the transfer of GM’s bad debts to the taxpayers, not its need for Uncle Sam’s cash during a ban.
Read more ▾
This book is available for free download in a number of formats - including epub, pdf, azw, mobi and more. You can also read the full text online using our ereader.
