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Authors: David Stockman

The Great Deformation

BOOK: The Great Deformation
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THE GREAT
DEFORMATION

THE GREAT
DEFORMATION

THE CORRUPTION OF
CAPITALISM IN AMERICA

 

DAVID A. STOCKMAN

P
UBLIC
A
FFAIRS

New York

Copyright © 2013 by David A. Stockman.

Published in the United States by PublicAffairs™, a Member of the Perseus Books Group

All rights reserved.

No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information, address PublicAffairs, 250 West 57th Street, 15th Floor, New York, NY 10107.

PublicAffairs books are available at special discounts for bulk purchases in the U.S. by corporations, institutions, and other organizations. For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, call (800) 810-4145, ext. 5000, or e-mail
[email protected]
.

Library of Congress Cataloging-in-Publication Data is available for this book.

ISBN 978-1-58648-913-7 (eBook)

Editorial production by
Marra
thon Production Services.
www.marrathon.net

BOOK DESIGN BY JANE RAESE

Text set in 10-point Utopia

FIRST EDITION

10 9 8 7 6 5 4 3 2 1

To my daughters, Rachel and Victoria,
whose future inspired me to start this book,
and my wife, Jennifer,
whose patience and loving support
enabled me to complete it.

CONTENTS

Introduction

PART I
THE BLACKBERRY PANIC OF 2008

  
1
    
Paulson's Folly: The Needless Rescue of AIG and Wall Street

  
2
    
False Legends of Dark ATMs and Failing Banks

  
3
    
Days of Crony Capitalist Plunder

PART II
THE REAGAN ERA REVISITED:
FALSE NARRATIVES OF OUR TIMES

  
4
    
The Reagan Revolution: Repudiations and Deformations

  
5
    
Triumph of the Warfare State: How the Budget Battle Was Lost

  
6
    
Triumph of the Welfare State: How the GOP Anti-Tax Religion Was Born

  
7
    
Why the Chickens Didn't Come Home to Roost: The Nixon Abomination of August 1971

PART III
NEW DEAL LEGENDS AND THE
TWILIGHT OF SOUND MONEY

  
8
    
New Deal Myths of Recovery

  
9
    
The New Deal's True Legacy: Crony Capitalism and Fiscal Demise

10
    
War Finance and the Twilight of Sound Money

11
    
Eisenhower's Defense Minimum and the Last Age of Fiscal Rectitude

12
    
The American Empire and the End of Sound Money

13
    
Milton Friedman's Folly: Rise of the T-Bill Standard

PART IV
THE AGE OF BUBBLE FINANCE

14
    
Pork Bellies, Floating Money, and the Rise of Speculative Finance

15
    
Greenspan 2.0

16
    
Bull Market Culture and the Delusion of Quick Riches

17
    
Serial Bubbles

18
    
The Great Deformation of Capital Markets: How Wall Street Got Huge

19
    
From Washington to Wall Street: Roots of the Great Housing Deformation

20
    
How the Fed Brought the Gambling Mania to America's Neighborhoods

21
    
The Great Financial Engineering Binge

22
    
The Great Raid on Corporate Cash

23
    
The Rant That Shook the Eccles Building: How the Fed Got Cramer'd

24
    
When Giant LBOs Strip-Mined the Land

25
    
Deals Gone Wild: Rise of the Debt Zombies

26
    
Bonfires of Debt and the Road Not Taken

PART V
SUNDOWN IN AMERICA:
THE END OF FREE MARKETS AND DEMOCRACY

27
    
Willard M. Romney and the Truman Show of Bubble Finance

28
    
Bonfires of Folly: Bernanke's False Depression Call and the $800 Billion Obama Stimulus

29
    
Obama's Green Energy Capers: Crony Capitalist Larceny

30
    
The End of Free Markets: The Rampages of Crony Capitalism in the Auto Belt

31
    
No Recovery on Main Street

32
    
The Bernanke Bubble: Last Gift to the 1 Percent

33
    
Sundown in America: The State-Wreck Ahead

34
    
Another Road That Could Be Taken

Note on Sources

Index

About the Author

INTRODUCTION

Less than two weeks before
The Great Deformation
went to press, the powers that be in Washington pulled off a “deal” that allegedly stopped the country from going over the fiscal cliff. What they did, in fact, was to permanently add nearly $5 trillion to Federal deficits over the next ten years, ensuring that the national debt will continue to surge higher and that Washington will become strangled even more deeply in a fatal paralysis of governance.

In truth, the fiscal cliff is permanent and insurmountable. It stands at the edge of a $20 trillion abyss of deficits over the next decade. And this estimation is conservative, based on sober economic assumptions and the dug-in tax and spending positions of the two parties, both powerfully abetted by lobbies and special interests which fight for every paragraph of loophole ridden tax code and each line of a grossly bloated budget.

Fiscal cliffs as far as the eye can see are the deeply troubling outcome of the Great Deformation. They are the result of capture of the state, especially its central bank, the Federal Reserve, by crony capitalist forces deeply inimical to free markets and democracy.

Why we are mired in this virtually unsolvable problem is the reason I wrote this book. It originated in my being flabbergasted when the Republican White House in September 2008 proposed the $700 billion TARP bailout of Wall Street. When the courageous House Republicans who voted it down were forced to walk the plank a second time in betrayal of their principled stand, my sense of disbelief turned into a not-inconsiderable outrage. Likewise, I was shocked to read of the blatant deal making, bribing, and bullying of the troubled big banks being conducted out of the treasury secretary's office, as if it were the M&A department of Goldman Sachs.

Most important, I had been an amateur historian on the matter of twentieth-century fiscal and monetary history, perhaps owing to my years on Capitol Hill and in the Reagan White House when they were embroiled in these topics. In fact, prior to my Washington years, while hiding out from the draft at Harvard Divinity School in 1968–1970, I had taken up serious study of the New Deal under the era's great historian Frank Freidel, and had continued the inquiry ever since. So when Fed chairman Bernanke began
running around Washington shouting that the Great Depression 2.0 was at hand, I smelled a rat.

Then, when the Fed's fire hoses started spraying an alphabet soup of liquidity injections in every direction, and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street, and that the threat of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.

At length, the sweaty visage of Treasury Secretary Hank Paulson appeared on the TV screen yet again, this time announcing that Washington was writing a $13 billion check to bail out General Motors. That's where I lost it. I had spent the two decades since I left the White House on Wall Street in the leveraged buyout business, and at that moment I was laid up on the injured reserve list because of my own fiery mishap in Detroit. I had organized, financed, and partially owned a $4 billion auto parts supplier that I had imprudently loaded up with massive amounts of debt, and which had then been crushed by the bumbling corporate bureaucrats at GM (and Chrysler) ahead of their own crash landing.

As a consequence of my Detroit experience, I was in the midst of proving to a US prosecutor that my company's bankruptcy was due to leverage and stupidity (mine), not fraud. But three years of fighting an indictment concentrates the mind, and by then I knew one thing for certain: the Detroit-based auto industry was a debt-enfeebled house of cards that had been a Wall Street playpen of deal making and LBOs for years, including my own; it needed nothing so much as a cold bath of free market house cleaning, along with a drastic rollback of the preposterous $100,000 per year cost of UAW jobs.

BOOK: The Great Deformation
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