Crashing The Big Machine

I've written a review of David Stockman's The Great Deformation and am posting it both here below and on Amazon:

For devoted followers of David Stockman's blog, this book is like fundamentalist scripture. Anyone trying to better understand the intensity of the daily diatribes on his Contra Corner website needs to read The Great Deformation to gain full immersion into his torment. He believes that our global economic system has become progressively unhinged over the past three decades and is now poised for a catastrophic collapse unlike any that has gone before. The book is a kind of conservative answer to  Karl Marx's theory of capitalism's end-game crisis, except that Stockman sees statist intervention - which has grown in scope over most of the past century - as the problem's cause, not its solution. In his view, Keynesian policymakers are like doctors continuously upping the dosage of bad medicine in a self-defeating effort to cure a disease they themselves have caused.

               The primary targets for Stockman's wrath are the world's central banks, and in particular the U.S. Fed. He sees The Fed, under Paul Volcker, as having done God's work in the early 1980's in taming the ruinous inflation that followed Richard Nixon's 1971 decision to default on America's gold-for-dollars promise that had for the preceding two decades successfully underwritten the world's monetary system. When Volcker retired, however, the devil took control in the person of his successor Alan Greenspan. Both Greenspan and his own successor, Ben Bernanke, poured liquidity onto every small crisis and drove the short-term policy rate along a secular downtrend that finally guttered  out at zero in 2008, where it has remained. Stockman sees this chronically loose monetary policy as doing little to help the "Main Street" economy, but everything to help Wall Street, which he believes has turned the Fed into its lap dog. Virtually free money, procured in the repo and other short-term markets, is used to fund aggressive leveraged speculation that drives the prices of stocks and other financial assets to unsustainable levels that inevitably collapse in crashes such as occurred in 2008. Connected fast-money players are able to read the signals and dump or reverse their positions in time to escape the full weight of the carnage, which is born mostly by hapless Main Street investors trapped in slow-moving mutual funds. The Fed then starts the process all over again by re-inflating the markets with fresh liquidity infusions.

               Stockman is a free-market conservative, but many of his rants would sound at home on the pages of Mother Jones, Daily Kos, or any of the other leftwing soapboxes where the same nails are hammered. Like his leftist counterparts, Stockman rails about the growing concentration of wealth in America which, in contrast,  he blames not on "capitalism" but on the cozy relationship that's developed between Wall Street and the government's monopoly bank, i.e. the Fed. Exclusive hedge funds and private equity firms are the vehicles through which the rich are able to compound their wealth. These are, of course, the very players who have learned how to exploit the Fed's interest rate suppression to pursue leveraged buy-outs, debt-financed share repurchases and other forms of financial engineering that provide high returns for their wealthy principals while increasing systemic risk for everybody else. Stockman believes that these destructive practices would be minimized in an environment where free markets were allowed to punish them with high interest rates.      

               There is an air of wounded innocence about David Stockman, who in his youth once attended Harvard Divinity School. He has a sincere and honest belief in the efficacy of free markets, which he sees being trampled everywhere he looks. He first rose to prominence in the early 1980's as Budget Director for the Reagan White House, where he arrived with a sharp mind and bright eyes, hoping to serve the cause of honest budgeting among ideological soulmates. What he found instead was an administration that had been hijacked by budget busters on all sides: monomaniacal "supply side" tax-cutters and "neocon" advocates for unconstrained military spending. It was, paradoxically, the Reagan administration that gave rise to the belief that "deficits don't matter", a notion that has metathesized into a lethal mantra now three decades later in the era of Barak Obama. Stockman believes that the combination of costly imperial overreach and the Ponzi-scheme financial logic inherent in the structure of social entitlement programs has now taken America to a point of no return. The colossal rickety machine continues to lumber along only because the Fed manages the funding cost through interest rate suppression. And that lasts only so long as foreigners go on buying the bonds needed to fund the deficits. These days are now numbered. And because America had led the world since World War II, its other major economies, including China's, have fallen in line behind us as we all descend into the same treacherous dysfunction. The crack-up, when it comes, will be global.

               Following his rancorous split with Reagan, Stockman found his way to Wall Street, of all places, like an honest priest stumbling into a brothel. He then wound up at a private equity firm, no doubt initially believing in that industry's self-defining mission of strengthening free enterprise by ridding companies of waste. What he found himself doing instead was taking control of vulnerable businesses, stripping them of resources, loading them up with unsustainable debt burdens, and plotting profitable exit strategies for himself and his partners. At one point he was even personally indicted for fraud, and while the charges were eventually deemed groundless and dropped, the former divinity student has to have begun questioning the road he had taken in life.   

               Traumatized by experience, he moved on to become a full time financial writer' He now declaims to us like Cassandra wailing from the top of the temple stairs in doomed Troy. In the bitterly partisan climate of contemporary America, Stockman is refreshingly non-partisan as he slams with equal virulence politicians of both major parties. He despises Richard Nixon for destroying sound money with his 1971 decision. He holds George W. Bush in even lower regard for accelerating the fiscal doomsday clock by embracing big government, costly military entanglements and lower taxes for rich people all at the same time. Democrats Jimmy Carter and Bill Clinton actually get off with a lighter touch, since Stockman credits them with at least a modicum of respect for fiscal prudence. Barak Obama, however, is another story altogether, as he has doubled down with the hated Keynesian poison since the day he came into office.

               There are, in my judgment, stylistic problems with Stockman's writing. He's shrill and grossly repetitive, and he probably could have covered the ground nicely in this book in half of its 712 pages.  He writes in the rolling cadences of an angry prophet, and he at times allows passion to outrun his logic. This book is full of facts and figures, but apparently not wanting footnotes to slow him down, Stockman provides not a single one.

               Still, I've learned to trust him, and I find most of his case compelling, despite his exaggerations, his unwillingness to see much good or wisdom in anyone, or his inability to offer practical solutions to the problem he describes. His last chapter is entitled "Sundown In America", which strikes me as far too peaceful a metaphor for the explosive picture he paints in this book.

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