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.
Some of the biggest winners were dealmakers such as Stockman, who worked at one of the biggest leveraged-buyout (LBO) firms that engineered such transactions. Hedge funds and other shareholders, including often badly conflicted executives at the companies being bartered, also reaped huge gains.
The companies themselves generally fared less well over time. Many took on monumental amounts of debt to fund the deals, and some ended up in bankruptcy. “The entire mega-LBO boom was the equivalent of a state-assisted fraudulent conveyance,” Stockman writes.
He’s had time and reason to think on the subject. In 2007, the Securities and Exchange Commission accused him of fraudulent accounting at an auto-parts company he acquired through an LBO. He paid a fine and settled the charges without admitting or denying them. Now he ridicules them.
But it was that mind-concentrating experience, he writes, that forced him to look hard at how he ended up running a massively indebted company at a time of economic chaos and led him to examine what he now labels the massive “deformations” in the U.S. economy.
They were everywhere he looked: Blue-chip companies such as Procter & Gamble and IBM, for instance, spent more money on stock buybacks and measures to bolster their share prices than they earned in net income over five years. He says such behavior effectively turned some companies into “liquidating trusts,” because they were spending more than they took in. He contrasts that with the emergence during the 1970s and ’80s of companies such as Microsoft, Cisco, Apple and Dell, which flourished under the tax structures of the time.
Stockman likes delving into details, and his book (to say nothing of readers) suffers because of digressions into often redundant examples. At the same time, he has a curious predilection to believe conspiracies and assume the worst motivations in many people he writes about. When then-Treasury Secretary Henry Paulson, a former Goldman Sachs chief executive, was trying to stem the worst financial meltdown since the Great Depression, Stockman writes, “the utterly myopic investment banker . . . wasted not a second ascertaining whether the public interest might diverge from Goldman’s stock price under the circumstances at hand.” The evidence for that assertion is at best circumstantial, but it is completely public, and it has been widely reviewed by others who haven’t reached quite that conclusion.
His skepticism of policymakers’ motives and his belief that capitalism works only if markets are “kept healthy and balanced by periodic purges of excess and error” inspire him to, in the main, oppose government responses to market crises.
“Washington’s massive intervention in September 2008 could not thwart a Great Depression 2.0 because the collapse of Wall Street could not have caused one,” Stockman asserts. “There had been no economic Armageddon looming, only a long cycle of debt liquidation, shrinking living standards and austerity — or exactly the outcome we have experienced anyway.”
On that, I believe, Stockman is wrong — and so, apparently, does he, for at another point he writes: “Had this attack been allowed to run its course, hundreds of billions in long-term debt and equity capital that underpinned the Wall Street-based speculation machines would have been wiped out, including huge amounts of stock owned by executives and insiders. Such a result would have been truly constructive from a societal vantage point. It would have implanted an abiding 1930s style generational lesson about the deadly dangers of leveraged speculation.”
Surely, that is a kind of Armageddon. Massive job losses, a nonfunctioning financial system and a shell-shocked nation aren’t “constructive,” even if they might finally stir policymakers to consider another path. However off-course our policies may be, mitigating the pain of adjustment has some obvious merit. Still, Stockman’s argument is worth hearing and heeding.
There was a time in Washington when it was common for politicians, pundits and the bloviating classes to warn of the burdens being imposed on “our children and grandchildren” by profligate government, feckless regulation and cosseted corporations. Few of us realized they were talking about us.
What Stockman has written is a book that makes clear we are that future generation of the past, inheritors of all the wishful thinking, simple illogic and flawed compromises that produced the near-term benefits our parents and grandparents worried about but ultimately wanted.
And now it’s payback time.
THE GREAT DEFORMATION
The Corruption of Capitalism in America
By David A. Stockman
PublicAffairs. 743 pp. $35