But it’s a fairly boring topic to write about – everyone already knows the “classic” finance books and I’ve never had much to add beyond the familiar names…
Released earlier in 2013, David Stockman’s The Great Deformation: The Corruption of Capitalism in America is not only the best book about the financial crisis, but also one of the most important books about economics and finance ever written.
It will make you reconsider what you “learned” about history in school, and also much of the mainstream thinking on the economy over the past 100 years.
And in an even more fun twist, it calls into question the very existence of this site and the entire business surrounding it.
Perhaps the growth of this site has nothing to do with me at all, but is instead linked to decades of mismanaged policies and corruption at every level in business and government.
No one else in this market, of course, would have the guts to address this topic head-on.
But hey, that’s why you’re reading this site, right?
Who is David Stockman?
He was Reagan’s Director of the Office of Management and Budget (read: “Budget Director”) in the early 1980s, after which he joined Salomon Brothers and then Blackstone, after which he started his own private equity fund (see: Wikipedia).
Things did not exactly end well there, but the key point is that he’s had a front row seat to US fiscal and monetary policy over the past few decades.
He has become quite a visible figure online and on TV over the past year, and for good reason: the book has incited rage across the political spectrum, angering liberals, far-right conservatives, and everyone in between.
Much of the criticism online has focused on the author’s background – someone who benefited from policies that propped up the finance industry is now denouncing them?
That’s a fair point, and you should keep that in mind as you read the book.
But I want to focus on his overall message and why his work is so important.
What’s It About?
The key difference between The Great Deformation and other books about the financial crisis is that it gives you a much broader picture of everything, going back over a century.
No, the crisis didn’t start with Alan Greenspan’s easy money policies, or with Reagan’s deregulation and massive structural deficits, or even when Nixon foolishly took the US off the gold standard in 1971.
It started in 1913 with the creation of the Federal Reserve, and Stockman traces how virtually everything since then has been a downward spiral into economic collapse.
He starts off by explaining how the bank/insurance bailouts of 2008 (“the Blackberry Panic”) were both completely illegal and utterly pointless for the Main Street economy, as there was no risk at all of a Great Depression 2.0.
With AIG, for example, the potential bankruptcy would not have spread beyond the holding company: all of AIG’s big bank CDS counterparties could have absorbed the losses (the worst case scenario would have been an $80 billion loss on… wait for it… $20 trillion in combined Assets), and the insurance subsidiaries would have been seized by state commissioners and safeguarded even if the holding company had gone belly-up.
In fact, Blackstone actually backed away from a buyout of a P&C insurance firm in the 1980s because of similar issues with state regulators possibly seizing and safeguarding the company’s assets.
Do you really think Ben Bernanke knows something that Steve Schwarzman does not?
After this introduction, he goes through the Reagan era and how most of the “revolution” was simply a myth that created massive structural deficits for no solid reason.
Then he jumps back to the New Deal era and shows how crony capitalism got its start, and why the common views of that time period are mostly incorrect.
And then he goes up through the present, tracing how Nixon’s move away from the gold standard in 1971 and everything that followed – from the bull market of the 1980s and the supposed boom of the 1990s to the havoc wreaked by Alan Greenspan and Ben Bernanke – is a result of propping up Wall Street and the stock market, running a constant structural deficit, and allowing the entire economy to be “financialized.”
His main point is very simple: since the US Federal Reserve (and central banks around the world) abandoned sound money, the entire economy has been off the rails and the middle class has stagnated as the wealthiest have benefited from a stock market that now has little to do with companies’ underlying fundamentals.
A secondary point is that government intervention and attempts to “soften” economic downturns often result in the complete opposite happening: a more unstable economy and a financial system dominated by special interests and lobbyists.
This is a very, very long book (~750 pages), and he addresses topics as broad as why the mega-LBOs in the mid-2000s turned into disasters, how Milton Friedman’s ideas also screwed up the economy, how the housing, education, and healthcare markets were distorted by the federal government, and why both Romney and Obama were completely incapable of doing anything to “fix” the economy.
This is NOT a Political Book
Although Stockman was officially a Republican in the 1980s, this is NOT a political book.
He spends just as much time attacking Nixon, Reagan, and George W. Bush as he does pointing out Obama’s follies, FDR’s misguided New Deal policies, and LBJ’s boondoggles.
True, he’s definitely not a liberal but he also does not identify with the current Republican Party at all.
And unlike many conservatives, he actually wants to strengthen the social safety net by fixing programs such as Medicare and Medicaid.
If anything, his philosophy is “anti-Federal Reserve” and is more aligned to the monetary axis than the fiscal axis.
A Few of My Favorite Things
Most books about economics and finance are quite boring.
This one was the opposite: I couldn’t put it down.
I found myself “procrastinating” over the past 1-2 months by reading more of it whenever I had a free moment.
The chapter titles alone are entertaining (“Deals Gone Wild: Rise of the Debt Zombies”).
But my favorite part was the myth-busting across different time periods:
- Great Depression / World War II: Some people argue the New Deal took us out of the recession, while other say it was WWII spending. The real answer is that neither one did it – instead, it was the massive domestic saving during the war that resulted in prosperity afterward.
- The 1960s and 1970s: He details why going off the gold standard was a horrible move, motivated more by Nixon’s reelection campaign than anything else, and how it was precipitated by (surprise, surprise) a combination of tax cuts and unfunded government expansion in the 1960s.
- The Reagan Era: He goes into detail on how most of the “defense buildup” in this time period was a complete waste of money – the Soviet Union was already headed toward collapse, and the vast majority of this spending was for conventional land and sea forces rather than nuclear weapons.
- The 1990s: Everyone prospered, right? Median incomes were up! Jobs were created! The stock market soared! The IT revolution! Well… not so fast. He presents numbers for job creation by industry and shows that much of this “growth” was a credit-fueled farce, aided by a ballooning trade deficit.
You’ve probably heard some of these points raised before, but the way he puts everything together and links historical events is impressive.
And it’s not just about the finance industry: he goes into other industries that have been deformed, such as housing, education, and healthcare, and explains why many of them are past the point of redemption.
How This Site and Related Businesses Are All Propped Up by The Great Deformation
All the shenanigans at the Fed and the constant “easy money” and “too big to fail” policies, of course, have enabled this site’s growth and have benefited me personally (even if I didn’t quite realize that going into it 6 years ago).
Perhaps this business would still exist anyway – after all, M&A itself has existed since 1708 when the East India Company merged with a rival firm.
But it would be a lot smaller. And fewer students and professionals would be interested in finance if the pay were much lower.
And everything else related to the industry – top MBA programs, top universities, other professional training companies – would also be much smaller or nonexistent.
Originally I was going to trace exactly how the vicious cycle works here, but that’s too cynical – even for me – so I’ve left it out.
I’ll leave it to you to think about how the distortions of the housing and higher education markets are related to the finance industry as well.
Stockman himself doesn’t argue that the industry should not exist – he just points out that its true functions of price discovery and capital raising have been supplanted by speculation.
You’ve always been able to get rich by working in finance, but it got much more lucrative after the 1970s – and that’s not a coincidence (Source).
The End: Sundown in America
Surprisingly, Stockman does not exactly predict a total collapse and economic meltdown.
That may come at some point, but the more likely near-term result is even more fighting over “fiscal cliffs,” “debt ceilings,” currency wars, protectionism, and dystopian social unrest as safety net programs are inevitably cut and the stagnating economy starts affecting everyone, even the top 0.1%.
There are potential ways to avoid this, but many of his proposals have a 0.00% chance of being implemented (examples: implementing a 30% wealth tax, abolishing incumbency and term-limiting all politicians, and a Balanced Budget Constitutional Amendment) without a coup d’état or an outright political/economic collapse.
Your Greatest Weakness…
It’s not a perfect book. It could have used better editing, and there’s a lot of repetition of key phrases and ideas.
Similar to reading Zero Hedge for long stretches, it’s not exactly an uplifting / happy-go-lucky read, though I still found the prose itself entertaining.
It is dense, and you will have a difficult time understanding 100% of it unless you are well-versed in monetary policy, finance, and accounting.
Also, he does not do a line-by-line citation of his sources.
He does list books and other references at the end, but he never points to where the specific data and figures he cites come from, in terms of specific lines and chapters of other materials.
The biggest problem, though, is that he rarely considers counter-arguments and sometimes does not cite enough data to refute possible counter-arguments.
For example, in one section on Bernanke’s quantitative fleecing policies, he points to the market’s volatility in the 2008-2009 time period (which saw some of the biggest 1-day gains and losses ever) as evidence of the Fed’s harmful easy money and bailout policies.
He claims that an “honest free market” would not experience such rapid swings, implying that this had never happened before recent times.
But even back in the late 1800s, long before the Federal Reserve existed, the stock market experienced extreme swings (see: 1879, when it returned 57% (!), and 1891, when it declined by 20%). True, these were not extreme 1-day swings, but there were still rapid gains and losses.
Citing facts and figures from 1-2 specific years without making a broader comparison over a longer time frame weakens his argument. See BOAML’s “The Longest Picture” for more on this one.
In another section of the book, Stockman writes about how the move off the gold standard allowed Asian countries to devalue their currencies (China reduced the RMB’s exchange rate against the dollar by 60% in 1994), use “cheap labor,” and become manufacturing hubs – resulting in the loss of manufacturing jobs in the US and other Western countries and a huge trade deficit.
While this is undoubtedly true to some extent, he overlooks other factors such as the market-based reforms in China that also resulted in higher production and exports there.
So it’s hard to buy into his arguments 100% since he tends to go for the “all or nothing” approach.
Conclusions & Epiphanies
In the title, I referenced The Wealth of Nations (yes, the Adam Smith classic from 1776).
In a sense, The Great Deformation is the “sequel” to that classic: while The Wealth of Nations lays out the foundations of a free market economy, The Great Deformation shows how, 200+ years later, the free market economy can still appear to be “free” on the surface while actually being horribly distorted underneath.
This book is not directly related to recruiting, winning a high-paying job, or even one of the TV shows I obsess over.
And you may find yourself disagreeing with much of what’s in it…
Or agreeing with some of it, expressing skepticism over other parts, and wondering what planet he’s from in still other parts.
But it will make you think - regardless of your reaction.
And it will entertain you more than many fiction books if you have even a passing interest in these topics.
For that alone, it is worth reading.