The Great Deformation

The Great Deformation

You may have never heard of David Stockman, who made his a career as a U.S. government budget-maker turned high-powered private equity financier. But you may be interested in his book, which attempts to unravel the 2008-09 global financial meltdown. I started reading it during the examination period and could not put it down, at the expense of my studies. What made it different from the multitude of other books on the same subject was the unique approach that the book takes on tackling what Mr. Stockman perceived to be the true, underlying cause of the problem.

That issue is stated in the subtitle: ‘The Corruption of Capitalism in America’ which is to say the modern financial system has been slowly transformed for the worse by a multitude of influential individuals, often for personal gain. The long list of figures whom he takes a go at includes Wall Street dealmakers, self-assured ivory tower academics and shortsighted politicians. From Federal Reserve chairmen Ben Bernanke and Alan Greenspan, free market professor Milton Friedman and J.M. Keynes, presidents Barack Obama and George Bush, to some surprising historical inclusions such as Franklin D. Roosevelt, Mr. Stockman does not discriminate. In his eyes not many are blameless from contributing to the inevitable train-wreck that was the GFC.

How exactly do all of the above contribute to a crash in the global banking system? Stockman says that governments, the US in particular, need to refrain from meddling too much in the affairs of the free market. Actions such as propping up failing banks through taxpayer funds, fighting multiple unfunded (i.e. untaxed) wars through excessive debt, artificially low interest rates to encourage private borrowing are all anti-market policies which distort the efficiency of the financial system. Through meddling, the US government created a series of bubbles such as the dot com and housing bubbles, eventually resulting in an inevitable reckoning in the form of the GFC. This end result is argued to be a deliberate outcome thanks to the distortions, and not ‘random shocks’ as some have proclaimed in the aftermath of the fallout.

The story doesn’t just end there; in fact that’s only the beginning. In his  700 page tome, Stockman traces out the history of all such meddling in the free market by various individuals, and has the unique ability to link each person’s action to its consequences. For example, he pins much of the woes of America’s current fiscal position to Richard Nixon, who took America off the gold standard so he could ‘boom’ the economy during his 1972 re-election campaign, so as to allow the Federal Reserve to issue government bonds to fund various projects to boost economic activity. This act, amongst others, created a precedent that allowed successive presidents such as Regan and Bush to fund massive spending sprees with unpaid-for government dollars, creating false impressions of prosperity when in fact it was a time bomb that had been planted.

With multiple examples like the above, expect ‘The Great Deformation’ to make you feel very pessimistic about the world we live in today and question the people who are in charge of running it. The parts which struck me as being most convincing are those where you can see the results of the events he describes: squabbling and destructive politicking on Capitol Hill, Wall Street executives being paid millions in taxpayer bonuses after bail outs, and the refusal of the people in charge to admit that something may be wrong. By putting together a story that goes against the Establishment, Mr. Stockman builds a compelling case for questioning whether the people steering the boat know what they are doing.

The writing itself however leaves much to be desired: it is by no means an easy read. There are many repeated points and some details are simply glossed over. Much of the book’s content is to be taken on faith, with very little examination into the sources and potential gaps in the contentions of the arguments. After a third of the way through you may be able to predict the outcomes of most of the stories that follows. By this point you might also feel the book is beginning to preach to the converted.

For all its flaws ‘The Great Deformation’ brings up many alternative economic thought and radical policies such as a return to the gold standard and fixed exchange rates, and manages to link them together with context and a coherent proposition for their adoption. It will make you seriously consider the effectiveness of mainstream economic thought and why other potentially good ideas are often swept under the rug. For this thought provoking ability alone, ‘The Great Deformation’ should definitely be on anyone’s summer reading list.