John McCluaghry: A financial perspective
David Stockman, by any standard, has to be one of the most brilliant public policy minds of the past 40 years. After six years as a young Michigan congressman, he burst upon the national scene as President Reagan’s 34-year-old director of the Office of Management and Budget.
In that role he was the frenetic, workaholic force behind Reagan’s economic plan, built around significant across-the- board income tax rate reductions for individuals, more rapid depreciation schedules for business investments, and cutting back on government spending and regulation.
Upon departing the White House in 1985, Stockman penned an incisive and somewhat bitter account of his OMB tenure, well received in no small part because of his somewhat unflattering portrayal of the president he had served. He moved into Wall Street finance, first with the Blackstone Group and later with his own asset management firm. There he labored with unexceptional results until (figuratively) hit by a thunderbolt on Oct. 3, 2008.
On that date President George W. Bush’s treasury secretary, Henry Paulson, formerly chairman of Wall Street titan Goldman Sachs, bullied Congress into approving the $700 billion Troubled Assets Relief Program (TARP). This was a desperate effort to bail out Wall Street’s panic-stricken high flyers, including notably Goldman Sachs, that had poured hundreds of billions into worthless subprime mortgages.
Stockman now writes: “I saw the light. The bailouts, the Fed’s frenzied money printing, (and) the embrace of primitive Keynesian tax stimulus by a Republican White House amounted to something terrible: a de facto coup d’etat by Wall Street, resulting in Washington’s embrace of any expedient necessary to keep the financial bubble going — and no matter how offensive it was to every historic principle of free markets, sound money, and fiscal rectitude.”
The result, five years later, is “The Great Deformation: The Corruption of Capitalism in America.” This massive work covers the history of the Federal Reserve, long since far removed from its sound beginnings in 1913; the destruction of the nation’s fiscal policy by Franklin Roosevelt; the fiscal tightening of Dwight Eisenhower; the enormous governmental expansion of Lyndon Johnson’s Second New Deal; the Richard Nixon-John Connally final destruction of sound money in 1971; the ultimately calamitous Reagan deficit spending balloon; and the Bush-Obama bailouts that have pushed the national debt to $17 trillion, larger than the nation’s Gross Domestic Product.
Stockman zeroes in on the egregiously irresponsible acts of the Federal Reserve system. After years of sound management by chairmen William McChesney Martin and Paul Volcker, the Fed under Reagan’s Alan Greenspan and Bush’s Ben Bernanke “had come in complete thrall to Wall Street”.
“Free markets and prosperity are deeply imperiled because the state and its central banking branch have failed miserably” he writes, “due to overreaching, overloading, and outside capture. They have become the tools of a vicious form of crony capitalism and money politics. At the heart of the Great Deformation is a rogue central bank that has abandoned very vestige of sound money.”
“In the process,” he continues, “the vital nerve center of capitalism, its money and its capital markets, had been perverted and deformed. Wall Street has become a vast casino where leveraged speculation and rent seeking have displaced its vital function of price discovery and capital allocation.”
Even Stockman’s brilliant mind finds it very hard to chart a path out of the abyss of debt and irresponsibility into which America’s economic and political fortunes are steadily descending. “The private economy has reached a state of utter dependence upon the central bank’s printing press, the bipartisan fiscal regimen of permanent deficits, and the military industrial complex that bolsters what remains of the manufacturing sector.”
In the book’s final six pages (of 727) Stockman offers 13 sweeping policy recommendations, some valuable, some wholly impractical, and some downright wrong-headed. Among the best is to essentially abolish the Federal Reserve by limiting it to making collateralized loans to liquidity-short banks at penalty interest rates, thus ending its trillion-dollar-a-year carnival of monetizing Treasury debt and its pegging of interest rates near zero as part of a grand scheme to manage prosperity on behalf of the most prosperous.
All in all, “The Great Deformation” does an exceptional job of incisively explaining — in detail and often very colorfully — how the Federal Reserve and the federal government are destroying America’s future. For those not conversant with the basic workings of Wall Street and Washington, it can be a challenging read, but Stockman shines a lot of light into places where thoroughly contemptible people have captured government and used its power to make themselves richer at everyone else’s expense.
John McClaughry is vice president of the Ethan Allen Institute.