By Mencken’s Ghost
September 26, 2013
Let’s begin with three questions:
1. What do you call someone
who makes a compelling case that both the Left and Right are responsible for
today’s economic mess and national decline?
2. What do you call someone
who makes a compelling case that the culprits include FDR, the New Deal, John
Maynard Keynes, Milton Friedman, Lyndon Johnson, Richard Nixon, Ronald Reagan,
Alan Greenspan, George W. Bush, and Ben Bernanke?
3. What do you call someone who makes a compelling case that both crony capitalism and crony socialism are equally harmful?
Answer: You could call that person insightful or non-partisan. Or you could just call him by his name of David Stockman.
The Left and Right finally see eye-to-eye on something: They both hate David Stockman and his 742-page book, The Great Deformation.
They claim that the book is sour grapes because Stockman was fired by Ronald Reagan, that he is a hypocrite for lambasting hedge funds although he ran one, that he can’t be a financial expert because he had personal financial difficulties, and that the book is poorly edited.
Well, the critics are batting .250. Of the four criticisms, only the last one is valid. The book is indeed poorly edited.
The intelligentsia say that the book is polemical instead of scholarly, something that Stockman admits in the book. Yes, indeed, the book aggressively attacks the opinions, records, and political philosophies of those whom Stockman holds responsible for America’s deformation. The New York Times does the same thing to its ideological opponents, but curiously, the intelligentsia don’t see the Times as polemical.
Actually, the book is brilliant and overflowing with insights not found elsewhere; certainly not in the New York Times—or Fox News.
Stockman has always been the brightest guy in the room, including such rooms as the Oval Office, congressional offices, and cabinet offices.
The brightest guy in the room is usually disliked, because he makes everyone else feel inferior.
Stockman certainly made me feel inferior. Before reading The Great Deformation, I egotistically thought I was in the 90th percentile of knowledge about political history, economics and finance. Compared to Stockman, I’m an ignoramous. I underlined so many facts in the book that I hadn’t known previously that it is one of the most underlined books in my library.
Stockman is one of the rare people who can connect seemingly disconnected historical dots. He can take what seems like an innocuous event from decades ago and show how it relates to current events.
His writing about pork bellies is a case in point. He explains how the venerable Chicago Mercantile Exchange was transformed through crony capitalism from providing a valued service that helped the economy to becoming a government-endorsed casino that hurt the economy. (I once worked in the Chicago Loop next door to the Merc.) The Merc began as an exchange where futures for storable farm commodities like corn were traded. The exchange enabled farmers to shift the financial risk of fluctuating farm yields from themselves to risk takers. The underlying commodity was a tangible asset produced through hard work. A trader who made a bad bet might even have to take possession of the commodity and pay storage fees.
In the 1970s, the Merc began lining up political and regulatory support to move into currency and other financial markets. Four decades later, it had become a highly-leveraged trading operation, with massive computers humming 24 hours a day to handle vast numbers of futures and options contracts, covering not only commodities but also currencies, T-bills, and equities.
Traders at the refashioned Merc had to post an initial margin of only two percent on currency contracts. As Stockman writes, “This meant that if the dollar moved by 10 percent, say from 3 marks per dollar to 2.7 marks per dollar, a punter [trader] could collect a 500 percent profit. And if this 10 percent move in the underlying currency pair occurred within the span of three months, as happened not infrequently, the annualized rate of return on capital at risk would be 2,000 percent.”
No longer was the Merc dealing in tangible products like corn and pork bellies. Among other intangibles, it was dealing in exchange rates for paper fiat money, the value of which was dependent on the whims of the politburos that run the Federal Reserve and other countries’ central banks, as has been the case ever since Nixon closed the gold window and tore up the Bretton Woods agreement.
You might ask, So what? Stockman provides the answer
Due to the dead-weight losses to society from this massive churning, [the Merc and other] hedging casinos are a profound deformation of capitalism, not its crowning innovation. They consume vast resources without adding to society’s output or wealth, and flush income and net worth to the very top rungs of the economic ladder—rarefied redoubts of opulence which are currently occupied by the most aggressive and adept speculators.
Stockman goes on to detail how the Merc captured its regulator through political connections. In the 1988 presidential campaign, for example, the Merc’s Political Action Committee gave $20,000 each to the campaigns of Republicans George H.W. Bush and Bob Dole, and Democrats Al Gore, Richard Gephardt, and Paul Simon. Also, over a fifteen-year period, no fewer than 85 senators and 200 member of Congress visited the trading floor and were paid an honorarium for executing a multi-million dollar trade.
The Merc gained unwarranted respectability by having the renowned free-market economist Milton Friedman endorse its transformation from pork bellies to financial instruments. Friedman said it was an example of free-market capitalism. It was nothing of the sort. It was crony capitalism.
It would be wrong to think that Stockman only skewers free-market pretenders. Here’s what he says about the New Deal:
The New Deal was a political gong show, not a golden era of enlightened economic policy. It shattered the foundation of sound money and inaugurated a regime of capricious fiscal and regulatory activism that inexorably fueled the growth of state power and the crony capitalism which thrives on it. But it did not end the Great Depression or save capitalism from the alleged shortcomings which led to the crash.
Here is what he says about Social Security:
When in the context of modern political democracy the state offers universal transfer payments [e.g. Social Security] to its citizens without proof of need, it offers thereby to bankrupt itself—eventually.
The New Deal social insurance [Social Security] mythology of earned” annuities on “paid-in” premiums that have been accumulated as trust fund “reserves” is thus an unadulterated fiscal scam.
The puzzling thing is that 75 years later—with all the terrible facts fully known—the doctrinaire conviction abides on the Left that social insurance is the New Deal’s crowning achievement. In fact, it is its costliest mistake.
Here is what he writes about Keynesian economics:
Keynesian demand management is nationalistic and autarkic, and can only work in a closed economy.
And the following is what he writes about Alan Greenspan and Ronald Reagan:
The Greenspan Fed’s fear of disturbing Wall Street also allowed the Reagan deficits to go unaddressed during the final year of the Gipper’s reign. This cemented the legend that deficits don’t matter and enabled the GOP to abandon its job as the agent of fiscal rectitude in American democracy. In fact, had the Fed pursued even a vague semblance of honest monetary policy it would have forced a financial crisis in 1988, crushing both the incipient bull market and the Regan economic legacy.
At the end of the day, the Fed’s Wall Street-coddling monetary policies of the 1990s masked the grave threat to the American economy that was incubating in East Asia. It is ironic in the extreme, therefore, that the credit-based boom in consumption and financial speculation that was engineered by the Greenspan Fed has been touted as evidence of the success of the Reagan Revolution’s supply-side policies.
In fact, the Keynesian boom of the 1980s and money-printing bubble of the 1990s were anti-supply side. Two decades of exporting US treasury debt and fiat dollars was generating damaging economic blowback aimed at the very heart of the economy’s actual capacity to produce output and jobs.
Ronald Reagan came to Washington to liberate free enterprise. The greatest irony of his presidency, therefore, is the appointment of a Fed Chairman who repudiated his essential purpose by institutionalizing a statist regime through the back door of activist monetary policy.
You can see why the Left and Right hate Stockman.
The book continues with detailed explanations of how the United States got to the current state of massive governmental and private indebtedness, falling incomes for the plebeians and rising incomes for the plutocrats, the exportation of jobs and industries, and the replacement of free markets with crony capitalism, mercantilism, and, most recently under Obama, fascism-lite.
He ends the book with 13 changes that need to be made to the American government and key institutions in order to restore widespread prosperity, knowing that none of them will ever be adopted or even understood by the masses. No. 2, for example, is to “Abolish deposit insurance and limit the Fed discount window to narrow depositories.” No. 7 is to “Abolish social insurance, bailouts, and economic subsidies.” No. 12 is my least favorite, because its first provision would negatively affect me the most: “Impose a 30 percent wealth tax; pay down the national debt to 30 percent of GDP.”
Truthfully, I would accept this horrible medicine if the other 12 changes were adopted, so that everyone had to share the pain of saving the nation and had to stop the immoral bequeathing of our debts and economic mess to our children and grandchildren.
On second thought, I hate Stockman for making me face reality.
Mencken’s Ghost is an Arizona writer who can be reached at firstname.lastname@example.org.