Entomology 101, A Review of David Stockman’s The Great Deformation
By Robert Gore
David Stockman tells the truth and knows what he is talking about. Either virtue disqualifies him for Washington or the major media, so he blogs (davidstockmanscontracorner.com) and writes books. An insider as President Reagan’s budget director and then a partner in private equity powerhouse Blackstone Group, Stockman now loses friends and influences malcontents from his chosen perch on the outside. Ignore his book, The Great Deformation, The Corruption of Capitalism in America, at your peril. It chronicles the deterioration of the welfare-warfare state and reveals the economic, financial, social, and political horror show America has become. This polemic perforates the media’s stock-market fueled happy talk, war propaganda, and endless trivia that divert attention from our dysfunctional economy and corrupt, bankrupt government.
At the head of the caravan on the road to ruin is the dollar, journeying from good as gold (before 1913 and the Federal Reserve Act) to “accounting unit,” conjured from thin air by Stockman’s “monetary politburo”—the central bank. The last mile was President Nixon’s 1971 elimination of vestigial dollar-gold convertibility, for foreign central banks. Convertibility was the parent in the house who kept the high schooler’s party from getting out of hand. Once it went to bed, Washington cranked up the music, broke out the beer and bongs, wrecked the furniture, and jumped joyously naked into a back-bedroom group grope.
The Four Horsemen of the Apocalypse have been government deficits and their central bank enablers: debt monetization, interest rate suppression, and balance sheet expansion. No longer is the Fed confined to the stodgy task of maintaining the dollar’s value (a job it has performed abysmally), and acting as lender of last resort. Its remit has expanded to pumping up the economy to its “full employment potential”; keeping interest rates lower and asset prices—particularly equity and house prices—higher than what would prevail in a free market; becoming the largest buyer of Treasury debt, and guaranteeing bank profitability. The Fed has morphed into economic matriarch, kisses and a bandaid for every boo-boo, milk and cookies to make things all better.
In 1987, the newly installed Federal Reserve chairman wrote the legendary “Greenspan put” (that later became the “Bernanke put”), opening the sluice gates of liquidity to quell a stock market crash that was not a harbinger of a depression or even a mild recession. Wall Street speculators, a pretty sharp lot, got the message: the Fed had their backs, and the stock market was soon off and running again. Liquidity provision became the default option for every financial squall. Greenspan even juiced the system in 1999 for a storm cloud—a potential Y2K malfunction of computers’ date programming—that never rained a drop.
Noting the diminishing returns from each new Fed market-short-circuiting munificence and the declining trend of interest rates to their present ground-hugging level, Stockman delineates a multitude of wantonly destructive consequences and issues a mea culpa for his role in the carnage. Cheap money provides the wherewithal for levered speculation by hedge funds and other gamers—backstopped by that central bank “put”—and all manner of what he calls “financial engineering,” aka financial flimflammery.
With cheap debt and a sliver of equity, private equity shops buy a company (hence the term leveraged buy out), load it with more debt, pay themselves special dividends, cut capital investment and payrolls to the bone, put lipstick on porcine financial statements, take the monstrosity public, and escape with profits that are often a staggering multiple of their initial investment. Stockman, refreshingly nonpartisan, demonstrates that this was how “job creator” Mitt Romney actually made his fortune at Bain Capital.
Financial entrepreneurs build merger and acquisitions empires (paying hefty fees to investment banks, who then tout their companies), spouting bromides about synergies and cost cutting, to which investors are supposed to pay attention, while they ignore ever rising “goodwill,” the accounting term for the premium paid over what the acquisitions are worth. Not surprisingly, many of these debt- and goodwill-laden houses of cards collapse…after their promoters have been made whole.
Cheap credit funds corporate stock buybacks, a “shareholder friendly” exercise that bumps the share price, and the value of executive stock options (taxed at the lower capital gains rather than the ordinary income rate). Shareholders invest in a corporation to earn a return on the company’s investment and production, so how is it “friendly” to give them their money back rather than to invest and produce? Never mind.
Cheap debt and central bank monetization have fueled the growth of the federal government and its public-private subsidiaries: the warfare state’s military-industrial-intelligence complex, and the welfare state’s housing, energy, finance, agricultural, entitlement, and medical complexes, the last of which Stockman says, “is in a league all by itself.” He writes a pithy history of medical care since 1943, when FDR’s brain trust decreed that employer provided pre-paid health services were not taxable. This initiated the lather-rinse-repeat cycle where “one market disturbance by the state begat another.” Obamacare is just the latest iteration. With the economy faltering at peak debt, more of the population will “be flushed into the state-funded pools of Medicare, Medicaid, and the Obamacare health exchanges,” piling on more unsustainable debt.
The reckoning has already arrived. Stockman makes a well supported case that the US economy has deteriorated since the 1971 closure of the gold window, the deterioration accelerating after the new century’s financial crises. The scant economic fruits have gone disproportionately to the wealthy. Another crisis, the most severe yet, is inevitable. Stockman offers remedies, but given the nonstop political turmoil and gridlock he foresees, it’s a wish list. Although his work is not political philosophy, wherein actual solutions are found, it is nevertheless valuable. He has turned over a rock and shone his light on the saprophytic Washington-Wall Street ecosystem of creepy-crawlers sucking the life out of our decaying country.
This review first appeared on straightlinelogic.com, 9/29/14.