by Brian DeChesare Comments (42)

The Great Deformation: The Corruption of Capitalism in America – The Most Important Book on Economics since The Wealth of Nations?

The Great DeformationI am often asked for book recommendations.

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…

Until now.

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?

Historical Fallacies

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.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. i saw an interview with david stockman when he came as a guest on ron paul’s channel recently and they were chatting like old buddies.

    i’m a second year mba… missed out on the ib boat, but i’m trying for a role in transaction advisory services so that interview with the guy at one of the big 4 earlier this week was helpful!

    1. Avatar
      M&I - Nicole

      Thanks for your support!

  2. Thanks for the recommendation.
    This sounds very similar to ‘The Great Degeneration’ by Niall Ferguson that I read over the weekend, declining institutions, over-regulation, education costs dividing the public. Good stuff.

    1. Yup it’s similar. I loved Niall Ferguson’s take-down of Paul Krugman, highly entertaining.

  3. Brian

    Have you read Marx’s book “Das Kapital” or other similar books and essays? IMO if you want a more holistic perspective on why certain economic events happen, it’s better to avoid reading only libertarian-esque critiques and check other sources/schools of thought as well.

    1. Yes, I have, and I’m open to different viewpoints but I personally don’t find Marxist views quite as convincing (has any truly socialist/communist country ever worked over the long-term?).

      I don’t review books here very often but I’ll see if we can feature something offering a different perspective next time around.

  4. Hey Brian,

    If I wanna get into infrastructure finance/project finance – would real estate lending be relevant at all?

    Also, what type of questions would they normally ask in infrastructure finance interview? Would it be closer to IB type or closer to lending type questions?


    1. Yes, real estate lending is somewhat relevant since RE and infrastructure/project finance have some conceptual similarities with modeling.

      I would check out this article on infrastructure finance for an overview of what to expect in interviews:

      1. Thanks Brian – I think most of those are applicable to infrastructure PE but not necessarily infrastructure finance. Do you have a few sample ones for project/infrastructure finance interviews at BBs?

        1. Not at the moment, but there is 1 interview on Infrastructure IB coming up and one on Project Finance after that. I don’t have drafts yet because the interview process is still ongoing.

  5. Hi Brian,

    Very insightful article, and the book sounds like a great read.

    I am writing to you because my younger brother has just started his second year of college at The University of Chicago, and he has a very high G.P.A., I believe 3.8-3.9 g.p.a, and he is majoring in Economics.

    My brother is interested in working in Wall Street, and I was wondering if you could maybe direct me of potential products and/or coaching that maybe a fit for my younger brother, since he still has approximately 3 years of college remaining.

    Do you any recommendations of products that you recommend for my younger brother being that he has just started his second year of college?

    Please let me know if you have any suggestions and/or advising.

    1. Thanks! I would start with the interview guide and networking toolkit here as those are the most applicable for younger students.

      We don’t offer coaching for 2nd year university students and I don’t think it would be appropriate for him at this stage. The most important thing right now is to get a solid internship, which the networking toolkit and interview guide would help with.

      1. Hi Brian,

        Thanks for the reply back and advising.

        I just wanted to follow-up with you.
        My brother just did a Wealth Management Summer Internship at a boutique firm this past summer(summer 2013) in his hometown of Ohio.

        So, I was wondering given the fact that my brother has already done one finance internship already. What would you advise the next steps that my younger brother should do?

        My brother goes to a target school (University of Chicago), is majoring in business (economics), has a very high g.p.a.(3.9), and is a Varsity Athlete, and also has a leadership position in a student organization.

        Virtually all the top Wall Street Companies recruit to some capacity and some extent at The University of Chicago. What would be your advising of what the next summer internship that my brother should aim for the summer of 2014?

        I am assuming that an Investment Banking Internship is not possible at this stage yet, but I know that many Bulge Brackets and financial firms/companies in general offer numerous summer internship opportunities for students after they complete their second year of college.

        I will look into purchasing the networking toolkit, and interview guide products that you recommended for my brother.

        Any and all additional advising and suggestions that you can provide for my younger brother after reading this follow-up message that I just wrote, will be very much greatly appreciated.

        1. Get an internship more relevant to IB/PE first if you already have a PWM internship. For example, work at a small/local PE firm or other investment firm or a boutique bank. It’s definitely possible to get those types of internships even if you are relatively young because they don’t scrutinize as much for shorter-term / part-time roles.

  6. Can’t wait to read the book!

    Klarman is wrong. “Capitalists” shouldn’t have to “insure” the lower class. It’s that very attitude which creates unnecessary government, effectively “insuring” those at the bottom of the economic period stay impoverished forever.

    Bernanke is either the smartest guy or the dumbest guy in the room, and it’s impossible to tell which.

    Anyone who argues that war is good for the economy is an idiot (unless of course they are referring to the fact that installing friendly governments in resource rich countries is a positive for the victor). War is destructive, the antithesis of production and growth.

    The first two chapters of The Creature from Jekyll Island are excellent, but the rest of the book is complete nonsense – the author is off his rocker. Unfortunately Austrian Economics and Libertarian philosophy seems to attract both the smartest and the craziest people around.

    The central banking system was designed to serve private interests, not the public good. The contraction in the money supply which caused the Great Depression was the result of The Fed. There is zero evidence the financial system has been more stable since Fed inception.

    If/When the dollar loses reserve currency status, it’s game over for the United States. It’s really unfortunate that the US is rapidly becoming fascist, but it seems human nature is inevitable.

    Anything to add Mr. Dechesare?

    Huge fan of your thought process and writing by the way. Are you living in NYC? I’ll be travelling there next month with my company and if you’re free it would be a thrill to meet you.

    1. Thanks! Those are all good points. In particular, I don’t think people understand how badly the Fed has failed at boosting growth and keeping inflation down – and even “reducing crises”:

      I’m not in NYC right now but I do go back there occasionally, will try to post an announcement when that happens.

    2. Josh, Can you give a little bit more to back you claim that “the US is rapidly becoming fascist, but it seems human nature is inevitable”.

      What do you see as indicators of pending fascism?
      Oh, and by your comment on `human nature’, did you mean that the basic defining characteristic of humanity is to be fascist or what?

  7. Thanks for bringing up this book, I’ve added it to my list.

    One question though – he says that the abandonment of the gold standard allowed for the depreciation of Asian currencies. How would have the gold standard stopped China from depreciating the Yuan and subsequently taking America’s manufacturing jobs?

    1. Because back then, all exchange rates were fixed and since the USD was linked to gold, effectively so was everything else. So one country could not come in and just devalue its own currency to boost exports.

      Currencies could still move a bit, but only within a very narrow range of ~1% or so. Then the kept loosening standards in the years after that, until currencies became free-floating (in 1973).

      1. I see what you’re saying but I’m still not entirely clear. What would happen if a foreign country (whose currency is fiat and fixed to USD) increases its supply of money in an effort to bring the fixed exchange rate down to a more favorable level?

        1. If the country is on the gold standard or has currency pegged to a currency that is linked to the gold standard, it would be restrained from just increasing the money supply because it would have to maintain a certain amount of gold reserves at all times to back its own currency.

          And under the classic gold standard, if the country is running a trade deficit prices would fall and its exports would become cheaper, while imports would become more expensive, so the deficit would correct itself (See:

          The problem is that when there’s no constraint on countries’ money supplies, they can do whatever they want and there’s no discipline around deficits or the value of currency.

          So in your example, a foreign country whose currency was linked to the USD, which is in turn linked to gold, could not just increase its money supply without also acquiring more gold.

          1. Okay, I understand what you’re saying. Thanks for the explanations Brian and Adam

      2. “Because back then, all exchange rates were fixed and since the USD was linked to gold, effectively so was everything else. ”

        That’s the Bretton Woods system. Before Bretton Woods curriences were (mostly) on separate gold standards (i.e. 1 USD = xx grams of gold, 1 CHF = yy grams of gold) and could adjust/cancel those standards if they felt like it. Most countries didn’t mess with the standards because it caused capital flight from international banks/investors if they did, but they could (and indeed did) if they really needed to.

  8. Great Review.

    Will get the book.

    I love this site !

  9. Hello there!

    The book sounds very good to read from many perspectives. I am not an American, but have some friends there and all I hear is how much people changed there in the past 200 years (from an economic perspective of course).

    There is another interesting book which talks more about Fed start (“The Creature from Jekyll Island”).

    It’s interesting though, how fearful and skeptical were people at a central bank idea and the failures of the first chartered banks before the Banking Act in 1863 (or so). Now, no one thinks in those terms any longer.

    1. It has changed a lot. The US really is in a state of permanent decline and the overall quality of the population is much lower than it used to be – even though people here like to deny it. I think when the USD finally loses reserve currency status, it might sink in.

      Some are still skeptical of central banks, though it would be pretty tough to reverse policy at at this stage.

  10. Tedd, Brian, JD, while I have read Stockman’s book yet, I don’t disagree that Gov’t spending restrictions helped public sector savings, thus cuasing a pent up demand post War, but we are missing the elephant in the room : All factories and major city were annihilated except for in the US. US govt spending via Marshall Plan and Asian equivllant help establish factories in those regions (to “defend” against Communist influence), money that filtered back to the US factories.

    1. Yup that is true as well. The US being spared and then being able to export to other regions played a huge role. But if consumers hadn’t saved at the highest rate ever during WWII (I think it reached 17%, an all-time record), the post-war boom would have been smaller (and yes, spending restrictions + lack of things to buy also added to that, so perhaps they had to save at that rate regardless).

      This is actually a pretty minor point in the book, so I’m surprised that it drew so many comments. He really just mentions this in passing as something that people overlook about this time period.

  11. The author is in support of a fixed gold standard? Wouldn’t that choke off economic growth though? If you fix the money supply, then a growing economy has no room to increase prices. That’s probably going to lead to a lot of deflation so I don’t think that would such a good idea….

    1. He knows it’s not realistic to go back to the gold standard, but it is possible to introduce sound money policy once again by limiting what the Fed can do and requiring balanced budgets… which is what he proposes.

      The gold standard doesn’t limit economic growth – the US was on the silver standard starting in 1792, then a mix of greenbacks and gold, and then gold from 1879 to 1971 (with variations of that in between). In that time, GDP grew from $50 billion to over $1 trillion and per capita GDP was up as well. The money supply is different from wealth and the overall economy.

  12. “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.”

    In order to have domestic savings, you need public sector spending. This comment does not make sense. If you understood how the economy works, you would know that public sector deficit = private sector surplus.

    1. I was simplifying the actual passage from the book. His point was that *military spending* on WWII did not actually do much afterward because the military does not contribute to the civilian economy. And most peoples’ standard of living didn’t go up at all during the war – it was only afterward that that happened.

      1. War is not good during wartime. Economic growth is bolstered by huge misallocated capital in producing bombs and bullets, planes and tanks which destroyed. What did good for the US was a spending restriction, which created pent up savings for the consumers, and this drove the economy post WWII.

        Note, if Axis/Germany won WWII, the economic outcomes would be vastly different.

        1. There you go, that’s the proper explanation…

          1. Military spending is a portion of public sector (government) spending. The economy works in balance with the basic accounting identity of: Private Sector Surplus (Savings) = Government Sector Deficit + Current Account Balance (or – Capital Account Balance).

            Since the US runs consistent trade deficits (capital account surplus) in order to have a Net Private Savings the government deficit must be larger than any capital account surplus.

            These three sectors of the economy (Public, Private, foreign) always run in balance.


            Feel free to go to the St. Louis Fed website and run the data for yourself.

            Regarding the WWII discussion, yes I agree the economy was bolstered by WWII military spending which provided the private sector savings and therefore drove the economy post war.

  13. Avatar
    punit lohani

    Thoreau said, “Goodness is the only investment that never fails.” It is sad that we needed a financial crisis to understand such a simple concept.

    1. I’m not sure about that one, but goodness seems like a better investment than subprime mortgages… maybe

  14. “Do you really think Ben Bernanke knows something that Steve Schwarzman does not?” The obvious answer is yes. Bernanke did his PhD thesis on the Great Depression and the factors that caused it. Schwarzman thinks closing tax loopholes is akin to Nazism.

    1. Actually, Bernanke completely misinterpreted the Great Depression (there’s even a section devoted to that topic). And the issue at hand is not who knows more about the Great Depression, but rather who understands the state regulations that apply to insurance companies and why even if the holding company goes under, the actual insurance subsidiaries persist anyway.

      Bernanke either knew that AIG should not have been bailed out and went along with it anyway, or simply had no clue and kept pushing for it.

  15. Sounds like a book on history from the Austrian school of thought.

    Indeed, capitalism unfortunately ends up concentrating wealth in those supplying capital, at the cost of labors’ share of profits. Klarman states in his book MoS that capitalists should serve to “insure” the labour/proliteriat class from bankruptcy.

    1. It is, partially. But his argument is more that true free market capitalism lifts everyone up, while crony capitalism and unhinged central banks benefit the wealthy and concentrate power at the top.

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