David Stockman made a timely presentation of his new book titled “The Great Deformation: The Corruption of Capitalism in America” at the Cato Institute to a large and responsive audience. Stockman explained that he is rejoining the public debate after many years of absence because he was “run out of town on a rail” back in 1985.
I knew Stockman when he was a congressman and later President Ronald Reagan’s Budget Director. In fact, I drafted the minority views on the first Chrysler bailout when Stockman, not a member of the House Banking Committee, was the only member of the Michigan delegation to vote against the bill.
The Cato presentation was especially timely because his recent article in The New York Times had been greeted by “a firestorm of denunciation,” led by the economist Paul Krugman, who called Stockman “a cranky old man.” Stockman expressed delight that the publicity Krugman generated has propelled the book to number four in Amazon sales.
His speech is neatly divisible into five parts, the three main points he makes in the book, his lists of heroes and villains and the rather idiosyncratic recommendations he offers at the end.
Stockman traces what he calls “the ebb and flow of evolution” of the fiscal mess over the decades “to try to identify the inflection points.” He puts the blame for the 2008 bailouts squarely on the George W. Bush administration and points out that the balance sheet of the Federal Reserve, which stood at $900 billion after 94 years of the Fed’s existence, then doubled in a mere seven weeks, growing at $700 million per hour. He declared that the debt the administration bought was bad debt and should have been allowed to take down the institutions that had recklessly invested in it.
Regarding fiscal policy, Stockman credits the Eisenhower administration with putting George Humphrey in place as Treasury Secretary, reducing the postwar debt, downsizing the military, and “chipping away at the tax code.”
He recounted his feud with Newt Gingrich, in which Gingrich had called Stockman and other GOP members “the tax collector for the welfare state.” Stockman’s view is that the strategy of “starving the beast” undertaken by the Reagan administration had failed and that ultimately it is necessary to pay for the commitments the government makes in order to keep the deficit from getting totally out of control, as it has.
Stockman praised the late Sen. Carter Glass, D-Va., best known as the lead sponsor of the Federal Reserve Act that established the Fed and the Glass-Steagall Act that for decades prohibited banks from engaging in the securities business, as demonstrating wisdom by maintaining a limited vision of the role of the Fed as an agency that would not buy government debt, but would merely allow commercial paper to be discounted at a penalty rate.
The blame for the Fed’s transformation into what Stockman calls “a monetary politburo” goes to Milton Friedman, who Stockman sees as “a central planner, though he didn’t know it.” He criticized Friedman for assuming that the members of the Federal Open Market Committee would act as eunuchs as they endeavored to control the money supply in order to contain inflation.
It all went wrong when former Fed Chairman Arthur Burns turned the money spigot on in 1972. One of Stockman’s inflection points is the combination of the closing of the gold window in 1971 and the assembling by President Richard Nixon of a group of free-market economists at Camp David in 1972 to endorse a “New Economic Policy,” the same appellation employed by Soviet Union Premier Vladimir Lenin in 1921.
Now, Stockman says, this policy has evolved to the point where Eric Rosengren, president of the Federal Reserve Bank of Boston, is insisting that granny has to speculate in bonds in order to finance the ongoing bailout of the “too big to fail” banks.
Stockman laments the fact that the Fed’s aggressive intervention has destroyed the function of markets in setting prices for money and for commodities to which market participants will respond. Instead, the markets are merely “front-running the Fed,” and the money center banks are acting as branches of the Fed re-hypothecating dodgy collateral.
He compared the 2008 episode of the ongoing financial crisis to the panic of 1907, which was resolved by the actual J. P. Morgan as he mustered real capital and employed it in support of the banks and collateral he deemed worthy, letting the losers fail.
Heroes and Villains
Eighteen heroes and villains get recognition from Stockman. Conservatives will have little quarrel with the choice of President Franklin Delano Roosevelt as a villain for constructing the modern welfare state. Perhaps some would pause over the choice of President Dwight D. Eisenhower, because he did, in fact, create what was then the Department of Health, Education and Welfare. One might want to Google “Operation Keelhaul.” Stockman acknowledged that the choice of Clinton as a hero is controversial, but he credits Clinton for three balanced budgets.
Regrettably, Stockman did not stay for the reception, so there was no opportunity to challenge the recommendations that are bizarre coming from an authority as studious and sophisticated as Stockman. A believer in federal financing of campaigns, he would limit the terms of legislators and require by constitutional amendment that each Congress produce a balanced budget.
How would we know the budget is balanced? No problem. The Secretary of the Treasury would be brought under a Sarbanes-Oxley-type certification regime and would have to certify the budget as balanced, subject to criminal penalties. I’m not making this stuff up.
In conclusion, for readers who want to engage with Stockman in the policy debate, for those who haven’t already given up, the book provides useful information for drawing room debate.
Stockman also offers practical advice. To the question whether granny should stash her cash under the mattress, Stockman says, no, it should be in the mattress.
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