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Thursday, October 3, 2013

The Great Deformation: The Corruption of Capitalism in America

Nothing that anyone representing the government says should be believed without corroboration from a couple of independent sources. David Stockman makes a good case for this disposition of distrust in The Great Deformation. Specifically, Stockman casts doubt on nearly everything high government officials said to justify bailing out their cronies to the tune of billions of tax dollars.

This is a long book, but then the destruction of free-market capitalism in the United States has been a long (and sad) story. Stockman uses a familiar cinematic technique to tell it: He starts at the denouement, then backtracks to trace the events leading up to it. The story climaxes with what Stockman calls “The Blackberry Panic of 2008” and the wave of bailouts to which it gave rise. 

This story is replete with heroes and villains. Unfortunately, villains predominate over the likes of hard-money stalwart Carter Glass (of Glass-Steagall fame), the financially disciplined Dwight Eisenhower, and William McChesney Martin and Paul Volcker, the last two Fed chairmen to implement anything approaching sound money.

As for those villains? They range from the academic advocates of deficit spending and floating exchange rates—respectively, John Maynard Keynes and Milton Friedman—to Presidents Johnson and Nixon, who put their destructive theories into practice, and central bankers Alan Greenspan and Ben Bernanke, who carried these policies to their logical conclusions.

Stockman impressed me in terms of how on-target his story is despite almost no explicit reliance on Austrian economics, especially its cycle theory. Yet his analysis appears to owe more to the Austrian school than to any other. His frequent references to malinvestments in inflationary booms and the virtues of the gold standard are certainly Austrian in spirit. Still, it is unfortunate that he did not avail himself of Murray Rothbard’s monumental America’s Great Depression to further flesh out the details of that period.

Stockman riffs throughout on how excessive aggregation is the enemy of economic understanding. Case in point: a disaggregation of AIG’s balance sheet, showing that only $80 billion was at risk, rather than the $20 trillion claimed by Treasury Secretary Paulson. Thus, the contagion that would bring the economy crashing down if we did not squander billions of dollars bailing out AIG was pure fantasy. Shockingly, many of these dollars ended up in the pockets of Paulson’s former colleagues at Goldman Sachs. Stockman produces dozens of such examples, the results of applying decades spent poring through numbers, both inside and outside of government. This research allows him to peel away the layers of the onion to reveal the truth of the matter. 

Another point that Stockman makes over and over and over, but still not often enough for most policymakers and commentators to take heed, is that capitalism is not merely a profit system, but a profit-and-loss system. As unpleasant as the losses may be, they serve a therapeutic function of utmost consequence. By withdrawing that therapy, such policies as TARP, ZIRP (zero-interest-rate policy), quantitative easing, and too-big-to-fail, which Stockman lumps together under the rubric “the Greenspan-Bernanke put,” have brought the patient to death’s door.

Another theme he frequently reiterates is that the depredations he decries are emphatically not consequences of a free-market system. When Ludwig von Mises was asked what one institution distinguished market economies from socialist ones, he opined: the existence of a stock market. What he surely had in mind was a stock market that assisted the function of price discovery so as to permit rational economic calculation. As Stockman observes, the Greenspan-Bernanke put has crippled the U.S. stock market’s ability to carry out this vital function. In the same way, the Fed policy of keeping interest rates near zero prevented them from matching the time structure of production with the time preferences of consumers. Is it any wonder that productivity and employment stagnate when calculational chaos prevails?

This book has a sound theoretical foundation and offers a wealth of examples of how the State’s efforts to protect their cronies from the inevitable consequences of their own actions is impoverishing the rest of the country. It’s not a pretty picture, but this is all the more reason to sear it into people’s memories so they won’t be fooled by the next round of attempts to justify the unjustifiable.


  • Robert Batemarco teaches economics on an adjunct basis at Fordham University and Manhattan College. He was formerly book review editor of The Freeman. He is a member of the FEE Faculty Network.