Book review: ‘The Great Deformation: The Corruption of Capitalism in America’ by David Stockman

By Marcus Brauchli, March 29, 2013

David Stockman occupies a rare place in this nation’s public pantheon — the serial apostate.

While heading the Office of Management and Budget under Ronald Reagan, he called out his fellow Republicans for fiscal recklessness and repudiated policies that his boss was promoting. He soon left Washington for a place of presumably sounder financial thinking: Wall Street.

But once again, he encountered mankind’s shortcomings. A financier who built elaborate deals on foundations of debt, Stockman proclaimed the folly of such ways. He ran afoul of a prosecutor who accused him of not complying with accounting standards that Stockman later concluded didn’t make sense anyway.

Now, he has cast his acid eye on the country’s entire economic edifice. What the former divinity student sees doesn’t merely dismay, it outrages him morally, page after page, chapter after chapter. Stockman’s new tract, “The Great Deformation,” is a kaleidoscopic rant against people, institutions and practices he knows well. He attacks, upends, eviscerates, mocks and denigrates them all, usually with some justification, always in the brutalist prose of a manifesto.

The New Deal was a “political gong show,” and Franklin D. Roosevelt and Richard M. Nixon were “peas in a statist pod.” Morgan Stanley’s former chief executive, John Mack, is a “ruthless gambler and bully who never hesitated to exploit any avenue to make a buck.” Reagan’s defense secretary, Caspar Weinberger, was “obdurate and imperious on everything within his brief.” Alan Greenspan and Milton Friedman get entire chapters dedicated to their free-market heresies.

But here’s the thing: Even as he indulges his spleen, Stockman produces a persuasive and deeply relevant indictment of a system dangerously akilter.

Over the past 40 years, the United States has become a strange fantasy land where many politicians think deficits don’t matter, regulators are closely entwined with their charges, and the Federal Reserve manages the economy through high-stakes, high-risk experimentation. The financial turmoil of the past few years is just a glimpse of what lies at the end of the road we’re on, Stockman warns.

In showing us where it leads, he takes the long way, ambling past the wreckage of fiscal and market calamities dating back a century, pausing to praise the gleaming fiscal conservatism of President Dwight D. Eisenhower, then arriving at the ever-more-dire failures of the last generation.

The country began veering badly off course, Stockman argues, in August 1971. That was when Nixon decided to scrap the international financial arrangement that anchored the dollar’s value to gold and thus other currencies in the decades after World War II. “In an act that cascaded down through the decades, Richard Nixon caused the United States to default on its . . . obligations . . . and thereby inaugurated an era of global trade imbalance, currency pegging and manipulation, massive debt creation, and financial speculation that had no historic antecedents,” Stockman writes. “It became the era of bubble finance.”

First came the bubble in global oil and commodity prices in the 1970s, then the bubble in U.S. stocks in the 1980s, the Tokyo bubble of the late 1980s, the Asian bubbles of the 1990s, the tech bubble at the millennium and finally the housing finance bubble that imploded so catastrophically in 2007 and 2008.

Discrete events, the bubbles shared a genesis: They were often inflated by central-bank-created “easy” money — an abundance of low-interest-rate loans and other credit — that had been created to stoke economies, spawn jobs or spur exports. When share prices, or land and housing values, soared unsustainably and then crashed, the central banks reverted to what they knew and doused the smoldering ruins with a flood of yet more cheap cash. That in turn softened the earth for the emergence of the next asset bubble.

Making things worse was a pattern of chronically shortsighted political decision-making and craven tax policies that distorted sound business practices and encouraged self-destructive behavior by the private sector. Among the most infamous was the reduction of capital gains tax rates in the United States to a level far below top-bracket income tax levels. Combined with the gentle tax treatment of interest payments on debt, the low capital gains rate set in motion a wave of massive corporate takeovers and buyouts.