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.
