He was a graduate student at Harvard University , — studying theology. He was reelected in the two subsequent elections. In total, he served in the House from January 3, , until his resignation on January 21, , to accept appointment as Director of the Office of Management and Budget for President Ronald Reagan. Committed to the doctrine of supply-side economics , he assisted in the passing of the "Reagan Budget" the Gramm-Latta Budget , which Stockman hoped would curtail the " welfare state ".
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Start your review of The Great Deformation: The Corruption of Capitalism in America Write a review Shelves: politics , ec-and-finance , favorites This is the most significant book of No editor ever got near this manuscript. For completeness allow me to rearrange This is the most significant book of For completeness allow me to rearrange what he believes the Great Deformation to be. Ideally there would be no Fed at all, but if there was a Fed it would be busy undermining every economic recovery.
There would be no financial futures exchanges and very little trading of any sort. If you persevere till page , you will come across the following gem: "we have a rigged system -a regime of crony capitalism- where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.
Its contribution, if you will. The problem he sets up is threefold 1. There is a large tax advantage to financing with debt rather than equity, because the cost of servicing debt can be carved out of your bottom line, reducing the tax a firm owes to the government. Modigliani and Miller are wrong, basically. Exactly the same holds for home ownership.
Tax on regular income be it from dividends or from going to work every day is much higher than tax on capital gains 3. The Fed perceives GDP growth to be its chief mandate and its only tool to achieve this is cheap money, which was duly delivered, and especially so when asset prices were endangered. The present corporate bond cum stock repurchase bubble to support stock option prices for CEOs and upper management. Stockman describes these four bubbles from page to These pages of the book are fact-packed, well-written, fast-paced, gripping, revealing and downright forensic in their description.
As an added bonus, they provide a solid explanation for the soaring inequality in America: only a small fraction of the population is positioned to properly ride the four bubbles, via earning fees and rents rather than via actual exposure to the bubbles themselves. I was like "what happened to the rambling old man from the first pages" and then, on page , all was revealed: Stockman himself used to be a champion of Corporate Equity Withdrawal. A brush with bankruptcy, however, followed by a brush with the law, brought to a screeching halt his career that had weaved its way through Harvard, the US House of Representatives, the Reagan administration, Salomon Brothers, Blackstone and finally his own private equity shop.
At that point he had the epiphany that he had sleepwalked to the dark side. Having been a practitioner of leveraging companies to within an inch of their existence, he is as good an author you could hope for to explain the financial deformation of the last 20 years. He dedicates a full chapter to tearing Mitt Romney apart. Rather, Stockman has pity for Romney because neither Romney nor the Republican party that nominated him as its presidential candidate ever understood that Romney did not make his money the old-fashioned capitalist way, using capital to build companies.
The man made his money tearing them apart, very much at the expense of the American economy. The evidence presented in favor is bulletproof, but like any "reformed sinner" Stockman does not want that to be his main thesis. He needs it to be part of a bigger, all-encompassing scheme.
He wants you to hear his whole story first, the one about how the US government is the deformation. While often controversial, and in my view more often than not wrong, they all made me think. The book starts from the very end, with three views on the "Blackberry Panic of ": 1. As discussed, Stockman himself used to work for Blackstone and they looked very seriously into asset stripping a large insurer and the legal advice they got was that it could not be done.
Insurance is regulated on a state by state basis. Just because the holding company needed help, the states were not about to allow the assets to be released that were backing up locally issued insurance contracts. People would have pulled all their deposits from the main street banks since all their other sources of liquidity would have dried up who in turn would all be lining up at the Fed hoping it does a Bagehot and lends them money against their loan portfolios.
The ATMs would indeed have gone dark. There must be many other examples. Jeff Immelt was saved, not General Electric, when the Fed stepped in and guaranteed all Money Market funds and all commercial paper. And the French banking system too, how did that escape Stockman? Money Market funds are still stuffed full of their paper. Nice one. Then Stockman travels back in time to take us to the origins of the "Great Deformation" 4.
The Great Depression of the thirties had little to do with the gold standard and little to do with insufficient accommodation from the Fed that Bernanke apologized about in the famous speech to Friedman and Schwartz and everything to do with a collapse of US goods exports to overleveraged Europeans. A bit how China would suffer today if the world stopped buying cheap toys, expensive iPhones and everything in between, with the added kicker that when things went wrong 1. The sharp reduction after in the money supply was an inexorable consequence of the liquidation of bad debt, not an avoidable cause of the depression.
What do you want him to do? Yes, I know. Creative destruction. But with some type of time limit much like unemployment insurance it all makes sense. FDR put in place the foundations for crony capitalism. By establishing Fannie Mae he put in the foundations of the "Housing Complex" that begat the housing crash of By establishing Social Security he put in place the first of many government-sponsored Ponzi schemes, a job that was finished for him by President Johnson with Medicare and Medicaid.
A good 70 years. And how was FDR to guess what would happen to fertility rates, which are the true problem with Social Security along with our general unwillingness to give up on stuff we feel entitled to?
This is ideology here, not economics. Why should the US be the exception? Bernanke had a predecessor in messing with market prices and toying with wealth effects. Under the tutelage of Irving Fischer, FDR had messed with the price of gold on a daily basis to support the prices of agricultural products. One of the main American exports to Europe had been grain.
This, in turn, begat a bubble in land prices, which benefited from a positive feedback loop with the arrival of the tractor 15, in to 1 million in and inevitably a collapse when Europe could no longer import.
Farm mortgage debts, however, still had to be serviced. If you substitute the farming lobby of for the banking lobby in and FDR himself for Bernanke you get the picture.
For the record, FDR abandoned this effort within less than two years, while Bernanke is carrying on, almost five years since starting his bond-buying spree. Why had I not read this anywhere else? I knew about the gold thing, but I have never seen it attributed to an attempt to support the price of agricultural goods. Is it true? Bernanke also had a predecessor in buying Treasuries.
You guessed it, it was FDR. The Fed carried on owning Treasuries until the early sixties, and in the necessary amount to cap interest rates. Hell, I was born in the sixties 9. Eisenhower was the last president who systematically balanced the budget and the last president who actively chopped the defence budget. However, the gold standard was but a very useful sharia law of the market. Much like sharia law, once upon a time, and for the standard of its day, it had once been extremely effective and quite fair, if a bit harsh.
But gold, like, sharia law, requires everybody to buy into the religion. But the "T-bill standard" Stockman hates is the only game in town. Dollars backed by future tax receipts. Not sharia law, but American law. Go find me better. Reagan for whom Stockman was budget director, so he should know did not much cut spending. Moreover, he did not have it in him to cut defence spending and actually left the US with twice the defence budget as Eisenhower in inflation-adjusted dollars, and the military spent that money on conventional military power, planting the seeds of the two gulf wars.
Everybody knows Reagan is the father of the bond market. Hell, we shut down the day he died, to honor him. He probably borrowed a bit of money, then. Futures trading, which should have been used only to hedge the risks of agricultural producers, strayed into financial futures, allowed the financial sector to multiply exponentially in size, enabled the Salomon Brothers "bond arb" and led to the LTCM disaster and bailout of Nul points, monsieur Stockman.
The idea, furthermore, that speculators in New York hold an advantage over a guy who has access to physical assets, is ridiculous. Last I checked, the biggest grain traders on earth were Cargill, and God knows they trade the physical. Last I checked, the biggest oil traders on earth all own refineries and pipelines. I cannot stress how utterly wrong these arguments are. As recently as , investment banking was very much a cottage industry and its participants were regularly allowed to go bust.
Lehman, Shearson, Drexel spring to mind. This can be the only explanation for some of the worst points he makes in the whole book. And he totally misses the biggest banking deformation of all: when Glass Steagall was repealed, it was not the banks that became investment banks, it was the opposite. The investment banks went into the business of giving loans, with the added kicker that they were all booked as swaps and other derivatives, allowing the profit the NPV of years of Net Interest Margin to be booked upfront and immediately turned into bonus.
That is how come their balance sheets increased tenfold. Not because of cheap money. Finally, like all commentators, he has a fixation with the twentieth century concept of the balance sheet. Open your Bloomberg and look at Barclays. Balance Sheet is 1. Derivatives exposure is 80 trillion Sterling.
The Great Deformation: The Corruption of Capitalism in America
The Great Deformation