I just finished up an interesting book about the financial crash of 2008 by David Stockman called The Great Deformation. As you may recall, Mr. Stockman was the Budget Director in Reagan Administration from 1981-1985. After his tenure, he wrote a scathing review of the Reagan Revolution in 1986 titled The Triumph of Politics. After reading this book, it is easy to conclude that Mr. Stockman is not a very happy man, and he is happy to tell us all about it over the course of 713 pages. However, the book is full of the history that led us to the events in the fall 2008. Sometimes, Mr. Stockman's interpretation of these events leaves much to be desired, although on balance I found myself agreeing with him more than disagreeing.
Mr. Stockman basically takes the view that every course of "stimulative" action taken by the federal government going back to the New Deal was entirely unnecessary. While the book bogs down in the New Deal, and even during the Eisenhower years (Eisenhower was the one President he has admired most in the last 100 years). But he gives a very good argument as to why TARP was unnecessary. Ben Bernanke, Alan Greenspan and Hank Paulsen, Richard Nixon and Arthur Burns are clearly the three biggest villains in this book, although as we shall see there are a whole list of bad guys that got us into this mess, and a few good guys who really adhered to the principles of sound monetary management. This book primarily addresses actions taken by the Federal Reserve, although some fiscal policy is addressed as well.
From here, Mr. Stockman backs up and retraces a gradual decline of the Federal Reserve and notes that it really began in earnest when Richard Nixon removed McChesney Martin as Chairman of the Federal Reserve and appointed Arthur Burns in 1970. Nixon then promptly instructed Burns to pump the economy full of money and make sure that the economy would be booming in time for the 1972 election. Sure enough, Burns largely complied and the economy was booming right along on Election Day. However, the truly seminal event was in 1971 when the US abandoned the gold standard and went to straight fiat money, largely at the urging of Milton Friedman. This event would be the catalyst that brought about the speculative markets in currencies, US Treasuries and stock market indexes. The flood of money, and the abandonment of the Bretton Woods agreement unleashed the Great Inflation of the 1970's, which was only tamed with appointment of Paul Volcker to the Fed in 1978. He tightened up money severely, unleashing high interest rates that ultimately succeeded in bringing down inflation.
Alan Greenspan comes under a lot of fire in this book, too, and I largely agree with the criticisms. After the stock crash in October 1987, Mr. Greenspan pumped the system full of money to protect stock market prices. The Main Street economy was doing just fine, growing 7% in the 3rd quarter of 1987, then growing 5%+ in the 4th quarter followed by another 5%+ in the first quarter of 1988. The other seminal event was the 1998 rescue of Long Term Capital Management, which was leveraged 30 to 1. They made an erroneous bet on Treasury security prices and they were set to go out of business. Once again, Mr. Greenspan bailed them out. In doing so, he sent an unmistakable message to Wall Street that he would use the Federal Reserve to protect security market speculators who were paying exhoribant prices and leveraging themselves to idiotic degrees. Finally, this led Mr. Greenspan to oversee the most spectacular asset bubble of all time, the dot-com boom. He responded to this by flooding the system with money again, thus creating another bubble, this one the housing bubble which would lead to the events of 2008.
Ben Bernanke is also a big villain in this book. He panicked in the face of the crash of 2008, invoking comparisons to the Great Depression. Although Mr. Stockman does not mention much about all of Mr. Bernanke's quantitative easing (ie money printing), it is abundantly clear that the money is going to the financial economy on Wall Street and not to the Main Street economy. Hence, Mr. Bernanke's pump priming is doing nothing but enriching the 1%.
As for the various US Presidents, Mr. Stockman most admired Eisenhower while he most disliked Nixon. The man he worked for, Mr. Reagan, comes in for mixed reviews. He applauds Reagan for largely wanting to follow sound money principles and for his re-appointment of Paul Volcker as Fed Chairman in 1983 in the face of heavy Republican opposition. However, he also criticizes Reagan's stubbornness in insisting on a large defense buildup, which Mr. Stockman thought completely unnecessary. The defense buildup cost Mr. Reagan the capital he needed to cut other parts of the budget and the deficit exploded. Personally, I believe a defense buildup was needed at that time, although not nearly as large as Mr. Reagan insisted. As for our most recent officeholders, Mr. Stockman basically believes George W Bush and Barack Obama are both complete dunces. It is also abundantly clear that he regards Crony Capitalism as one the great scourges of our society. He says that Franklin Roosevelt was the father of Crony Capitalism with his New Deal, although the last two Presidents, Bush and Obama, have perfected it.
What comes through in all this, and it takes a lot to get through, is that Mr. Stockman sees a continual pattern of the Federal Reserve moving away from its original purpose. In doing so, it has created an environment in which excess speculation is encouraged (and losses are bailed out). The Fed has always been quick, in his view, to turn on the money spigot, especially in the last 40 years. Fiscal policy has also been irresponsible the last 30 years, from the Reagan defense build-up to the Bush Wars to Obama's stimulus and green energy initiatives. What this has all led to is the Fed pumping a bunch of money into the economy and enriching the few. None of this speculative excess trickles into the real economy, hence the 1% are enriched while the other 99% gets fleeced.
My verdict on the book? I give it a lukewarm recommendation at best. This is not an easy read, and I do not necessarily agree with all of Mr. Stockman's conclusions. The book has sloppy writing in places, it bogs down easily, and much of the book is based on Mr. Stockman's interpretation of events rather than actual research. But he does paint an interesting picture in places, and will cause you to think.
