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on 30 April 2013
David Stockman admits that his "The Great Deformation: The Corruption of Capitalism in America" is a polemic, and it is a polemic that will not endear him to many across the political spectrum. He has written an exhaustive account tracing the roots of our current economic problems to the solutions implemented by then President Franklin D. Roosevelt and his Keynesian economists in their unsuccessful efforts in shortening the "Great Depression", which truly ended only after the United States entered World War II. Stockman's book is one long argument not only against Keynesian economics, but more importantly, the crony capitalism practiced by presidential administrations of both major American political parties - Democratic and Republican - resulting in "The Great Deformation", in which Wall Street financiers have finely tuned the art and craft of financial speculation transforming Wall Street into one vast financial "casino". Stockman salutes President Dwight D. Eisenhower for being the only president since the Great Depression to reduce the size of the Federal Government by judiciously employing both tax increases and substantial budget cuts. While readers will not be surprised by Stockman's harsh condemnations of Johnson, Clinton and Obama, they may be shocked to read that much of the seeds of financial destruction were sowed by Nixon as an act of political expediency designed to ensure his reelection in 1972. He condemns the relatively recent bailout of General Motors, and the Obama administration's support of now bankrupt firms like Solyndra as sterling examples of the crony capitalism which has insinuated itself in American economic and political life since the 1970s if not before. Stockman also takes aim at Neo-Conservatives ("neocons") who have promoted substantial increases in defense spending at a time when the United States remains the sole superpower capable of projecting its military might across the globe; his is a view that has garnered ample support from Libertarian-oriented politicians like former United States Representative Ron Paul, and his son, current United States Senator Rand Paul, reflecting a long-term theme of isolationism that dominated American foreign policy for much of the 19th and early 20th centuries. "The Great Deformation" should be viewed as a clarion call for greatly transforming America's ongoing economic morass into one that he believes will be cured only by a drastic return to truly genuine free market economics; otherwise, Stockman thinks we are witnessing the twilight of the United States as a democratic republic, to be replaced by a more repressive, more Socialist-oriented, form of government. Given the substantial financial data and history which he uses extensively in supporting his arguments, those who remain skeptical may not be able to dismiss easily, Stockman's polemical account on the origins and probable future of the "Great Deformation". Without question this is a timely, important book on the intersection between economic policy, business and politics in the United States that warrants a wide readership.
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on 29 April 2013
I found this a consistently interesting,depressing but ultimately convincing book about how the financial system has become deformed over the last forty years after we abandoned what, effectively, was the final remnant of the gold standard. Although the analysis is based on the US it also applies to the UK which is, if anything , in a worse position.

His final prescriptions are, as I think he would acknowledge,not really feasible in the current political context and, although he doesn't say it,we're probably going to have to go through what may be a "final" collapse before the will can be gained to do something about the issues. Whether we will ever reach that stage remains to be seen.

If you don't understand finance and economics you'll find this book hard going and there is an element of repetition but, at the end of the day it's worth it.
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on 14 September 2014
There's a great deal to admire about this book, especially the underlying message -- that the massive growth in debt is making the vast majority poorer while enriching the 1%. I particularly like the fact that the author, an ex-Republican congressman and one-time member of the Reagan administration, then Wall Street banker and venture capitalist, is not afraid to admit the error of his ways and turn against Republican politics, Wall Street and the whole ethos of leveraged buy-outs, all of which have helped to wreck the economy.
There's some particularly interesting stuff around the middle of the book, page 300 or thereabouts, about the birth of derivatives trading in the late 1970s, and the incestuous relationships between Wall Street and Washington; how the new financial markets and so-called regulators were working together to make themselves rich. There's also an excellent insider's account of the 2007/8 financial crisis unfolding.

The book is not without faults, however. Although I found it quite readable and even entertaining in places, with lots of lines like this: `... the mortgage broker industry ... was swarming with hucksters who would write loans to any applicant with a heartbeat,' or: `Kozlowski ended up the chump whose visage in the pantheon of America's greatest CEOs was removed at a speed rivaling that of politburo portraits in Stalinist Russia' ... but it all becomes too repetitive and wordy after a time, especially the overdone clichés and mangled metaphors (eg, `... the derivatives explosion was just gaining its initial head of steam', or how about: `... turning a blind eye with a vengeance ...') plus much use of `needless to say' and `train wreck' and `behemoth' used as adjectives countless times, etc etc. I pick almost at random a sentence (from page 417) that sums up the writing style:
`It is hard to find a more discombobulated confluence of confused ideas and bad policies.' Quite, (though to be fair, the author's ideas, unlike his prose, are perfectly clear).

The book is muddled in layout too, as we flit from the recent past to the beginning of the last century and back again, going over everything at least twice. There's some great stuff in here, but it could have been edited to about half the length.
Another fault, at least for non-Americans, is that the book sees the world very much from the US viewpoint, especially when it comes to the chapters dealing with the the last three decades, the whole global debt problem being the fault of the US Federal Reserve and Alan Greenspan, according to Stockman. He might have a point, but much of the financial deregulation that sowed the seeds of the 2007/8 crisis took place in the City of London, where US banks set up offices to avoid US rules, but the British angle doesn't get a mention here.
And whereas most economic books talk about the `Reagan-Thatcher' years, here it's just Reagan -- Thatcher, along with every other non-American (except Keynes, who appears often as the devil incarnate), doesn't figure at all.

Although the author comes across as a champion of the people, his own views are right-wing in the old free-market, small-government tradition, and in this regard he is at least consistent, calling for lower defense spending as well as a much reduced welfare state.
Just occasionally he lets his ideology blur the facts, as here (from page 89), writing about the 1970s: `The resulting relentless push of inflation-swollen incomes into higher tax brackets clearly did stifle entrepreneurial energies and erode business investment incentives, thereby contributing to the abrupt slowdown of real GDP growth.'
This is hard to prove, as taxes were high in the post-war `golden era', yet growth was also high because of huge pent-up demand and a real industrial boom. So it's not at all clear that high taxes were the reason for the 1970s slowdown, as demand would be falling off anyway.

One of the many interesting points made by Stockman is how the conservative rulers of the world, in the form of the Wall Street and Washington elite, were now embracing the Keynesian policy of printing money to try and stimulate the economy. They did this not out of any socialistic view of helping the majority, but simply because a huge chunk of this new money would end up in their own bank accounts. As he puts it, policy action in Washington was now driven by `fast-money speculators and trading robots on Wall Street'.
By the same token, the supposedly opposed ideologies of `Keynesianism' and monetarism were now working together.

One of the author's merits is that he bows to no economic gods, except perhaps the old Austrian school. One might argue that he is doing Keynes an injustice when he goes on (and on) about `the Keynesian prosperity managers at the Fed', as Keynes understood the need for sound money as well as anyone, but he more than balances this with his diatribes against monetarist ideology.
That said, the word 'Keynesian' is absurdly overused in this book, along with a bunch of other pet phrases. All in all though, despite its excessive verbiage and length, this is a fascinating interpretation of events and contains some very convincing arguments.
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on 4 November 2015
In this somewhat lengthy yet very worthwile book, former Reagan advisor David Stockman argues that today's US economy has been warped out of shape by decades of state intervention to the point where free markets have almost ceased to function, with the result that living standards are slipping, a once vibrant and enterprising middle class has being hollowed out to the benefit of a tiny elite and the whole edifice is moving steadily towards the point where a catastrophic collapse occurs.

Along the way he takes a critical and very illuminating look at the New Deal (this could usefully be expanded into a book of its own), examines the functioning of the gold standard and Nixon's closure of the gold window, and details the various errors made by US monetary central planners over the last few decades. There is a also - rather optimistically - an interesting section detailing some of the policies that could be implemented to correct the distortions that bedevil the US economy, though there can hardly be much chance of any politicians taking note.

Although the book is aimed at a US readership, most of what is said here applies equally or with even greater greater force to the UK, and could be read with profit by British readers who are seeking explanations for the growing gap between rich and poor, continual boom-bust cycles and general economic under performance.

My only real criticism of this book is that it could do with a good edit. Potentially, this could reduce the length by about a third without any loss of substance, making for a much sharper and more focused narrative, which would have the added benefit of encouraging a wider readership. And this latter would be a very good thing, because what Mr Stockman has to say is well worth listening to.
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on 20 July 2013
The Great Deformation by David Stockman - a Review
Two major theses were being propounded by the author.
1. That the Financial Crisis of September 2008 Needed Not to have happened but was engineered by Ben Bernanke and Hank Paulson of Wall Street and Goldman Sachs. They engineered a panic that resulted in the bailing out with Tax-Payers money of Too Big To Fail (TBTF) banks thus making lots of money and greatly increasing the amount of debt that the U.S. owes the world. (chapter 1)
2. That the U.S. had been heading towards its demise for the past thirty to forty years. This began with FDR's, the 1931 confiscation of gold and the devaluation of the dollar from $20.50 to $37.50 in 1933 bringing in a change that had not happened since 1832, the New Deal and Richard Nixon's break of the dollar from gold in August 1971 after a fateful meeting with economists at Camp David. (rest of the book)
The author acknowledges that his thesis is revisionist history. I am therefore puzzled by the method of writing the account adopted by the author. The author used the method of themes within each chapter, which makes following the narrative difficult for the like of me - a retired surgeon who is not exactly stupid but brought up to be sceptical. There was no chronological order and one has to trust the author implicitly. I found it very difficult to demonstrate veracity in his arguments. I was taught that in re-writing history, especially if it was of a revisionist nature, that if true would bring about an entire paradigm shift, it is very important that the arguments can be easily proven and demonstrably so. I am NOT saying that the financial arguments quoted by the author are false. It is just that the way the book is structured makes it very difficult to demonstrate veracity. The author flits from one period to another to make his points. According to David, the New Deal did not end the recession (the conventional opinion) which was already put right by Hoover's tight-money policies of the preceding months. It seemed unlikely that policies would reverse the deep depression of the 1930s within a few months of their enactment.
Does not indicate or provide evidence that the Federal Reserve Bank is a private bank rather than a public entity, although it function as the central bank of America, thus hoodwinking millions of people.
Finally it is unclear to me the purpose of the book which the author does not say. Was it an exposé or was it written as a presentation of a personal philosophy in preparation for high office ? The likes of Ron Paul who has resigned from his membership of Congress this year opens the way for people like David.
From numerous opinion polls and the prevailing demographic shifts, it is fairly certain that the GOP party with its many splits can't win power again. There is also a general disillusionment with Barack Obama's Democratic party. Obama is a severe disappointment. Furthermore there is general hatred by the middle-classes of the Wall Street bankers. This means that David Stockman maybe trying to catch the attention of the third constituency of the young who made up the 99% of the Occupy Wall Street movement.
In the final chapter, there was a list of 13 tasks that will reverse the calamity that is facing the U.S.A. This seemed a contradiction to me as from the first chapter one is led to believe that the U.S. of A is in a terminal decline that is unsalvageable.
It was this final chapter that made me think of this thick volume as a personal manifesto. The thick volume of the book and the way data is presented, which makes it seem full of erudition is what makes me suspicious of its purpose. Was the author trying to hide his thesis of half-truths under the guise of erudition? This is a common ploy of politicians. I also feel that it is the political system where politicians are returned only if they carry out the wishes of the electorate that would explain how politicians would continue to believe in a system based on debts. The book was very USA centric as if the rest of the world does not exist, except in its discussion of the world wars and also China.

I wonder how the book made the New York Times BestSeller List!
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on 4 July 2014
In this expansive and well-researched work, the author tackles head-on one of the pressing issues of the age; the viability of the capitalist model. Drawing on his own experience both inside and out of government, Stockman makes a convincing argument for the need to rethink much of what we have come to take for granted about the corporate world and its relationship to government. Unlike many similar books on the subject, The Great Deformation devotes little time to speculation, choosing instead to let the record speak for itself. Although by no means a beginner’s guide, the book is nevertheless reader friendly, and provides a good platform for anyone who might wish to peruse the subject at greater length. I personally found the book an invaluable boon to my own understanding of the economic turmoil of recent years, in which I have a definite and lasting interest. In summary, I would thoroughly recommend this book to anyone wishing to expand their horizons on a topic that is ultimately of great importance to us all.
The book isn’t cheap, with the Kindle edition weighing in at a hefty $24, but then “cheap” is a relative term. Ironically, you can pick up a hardcover edition for ten bucks less. And if you have a membership at Audible, I can personally testify to the excellent quality of the narrated edition.
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TOP 1000 REVIEWERon 24 July 2013
This is the most significant book of 2013.

It's rambling and endless. 700 pages feel like 1,700. Frankly, it's a bad read. Halfway through, you can already complete every sentence yourself, that's how bad Stockman repeats himself. I'm not sure all numbers check out. No editor ever got near this manuscript.

Before I continue with why this is the most significant book of 2013, some more bad news: The author's unifying theory is in my view quaint and irrelevant. For completeness allow me to rearrange what he believes the Great Deformation to be. It's spelled out on page 691: "In trying to improve upon the people's work on the free market, Keynesian professors from Heller to Laffer introduced the nations' politicians to the witch's brew of deficit finance, unleashing a great deformation; that is, a state which lacked any reason to stop the larceny of the K Street lobbies and the plunder of crony capitalist raiders from General Electric to Goldman Sachs, the cotton growers, the UAW, the timber barons, the ethanol distillers, the venture capital industry, the Medicaid mills, and the scooter chair manufacturers too."

The story he weaves is a dirge, a lament about loss of innocence. In his ideal world we'd still worship the lost religion of the gold standard and the US would be run by Ike Eisenhower. 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.

Don't let that put you off.

Despite doing his best to sound like Will Bonner sans the writing skills, despite himself, really, Stockman, has penned the only book currently in print that explains in plain English what's happened from 1992 to present, rather than 1913 to present. If you persevere till page 560, 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."

This is the unwitting, true thesis of the book. 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.
2. 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.

These three factors have unleashed the four horses of the last 20 years' financial apocalypse

1. 1992-2000 Tyco-style LBO acquisition bubble that aided and abetted but also fed off of the Internet bubble
2. The 1992-2008 private equity bubble that toward the end was 100% about Corporate Equity Withdrawal
3. The 2000-2008 GSE / mortgage broker / subprime / Wall Street / CDO housing bubble
4. The 1992- present corporate bond cum stock repurchase bubble to support stock option prices for CEOs and upper management.

Stockman describes these four bubbles from page 404 to 576. These 173 pages of the book are fact-packed, well-written, fast-paced, gripping, revealing and downright forensic in their description. They are almost a handbook for how to use debt financing, the tax regime and the Greenspan / Bernanke put to your advantage. 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 400 pages" and then, on page 571, 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. He describes Romney's six biggest private equity deals, shows how every single one of them, while good for Bain capital, was actually a disaster for all other stakeholders and for the American economy and proceeds for the kill: his beef with Romney is not that he had acted in self-interest, pretty much like he himself had done. 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. And that's why he does not get to the truly innovative part of his book till page 404. He wants you to hear his whole story first, the one about how the US government is the deformation. In his chosen order, here's a list of his major bullet points. 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 2008":

1. AIG needn't have been saved. 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. Ergo, nobody was going to get hurt if AIG was let go other than Goldman, Deutsche and co.

MY VIEW: I only buy his argument outside the context of general meltdown. It's one thing to say "everybody would be getting their just desserts" which is a philosophical view and quite another to say "AIG was safe enough to fail" and to suggest that officials who had been in office for three to five years had a mandate to undo a system (love it or hate it) with a good 60 years of history behind it.

2. Main street banks would have survived the AIG / Wall Street meltdown because their books were clean.

MY VIEW: Again, unlikely. 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. Hell, they were hours from going dark at my employer, RBS, when the UK government intervened in October of 2008. There must be many other examples.

3. Jeff Immelt was saved, not General Electric, when the Fed stepped in and guaranteed all Money Market funds and all commercial paper.

MY VIEW: Stockman's right about that one, no doubt. And the French banking system too, how did that escape Stockman? Money Market funds are still stuffed full of their paper. But he does get the story in about John Mack's wife getting a 200 million dollar assist from the US government on some silly venture of hers. 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. tariffs went up around the world that made it even harder for Americans to export and 2. the market stopped lending to Europeans anyway. As for the Friedman / Bernanke theory, he has the following to say: "The monetary populists of the 1920s and 1930s, including professor Fischer, had "cause and effect" backward. The sharp reduction after 1929 in the money supply was an inexorable consequence of the liquidation of bad debt, not an avoidable cause of the depression."

MY VIEW: I don't know enough, but I'm startled that this view is not discussed more widely. I read and thoroughly enjoyed "Lords of Finance" as well as Bernanke's papers and no mention is made of the collapse of European demand for American-manufactured products. "Wow" is all I have to say. I'm inclined to believe Stockman here when he says the lack of liquidity was a symptom rather than a cause. "Lack of demand," for sure, but quite impossible to fix if the demand used to come from abroad.

5. FDR wasted everybody's time with the New Deal because he was trying to address an exogenous problem domestically.

MY VIEW: blah. What do you want him to do? Germany is currently paying companies up to 20% of workers' salaries to keep them employed. What's the alternative? Why pay them 100% to stay at home? Yes, I know. Creative destruction. But with some type of time limit (much like unemployment insurance) it all makes sense.

6. 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 2008. 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.

MY VIEW: We're talking some serious lead times there, no? 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. With all countries on the planet featuring some type of state retirement scheme and state-sponsored health service, the onus of proof here is with those who don't want Social Security, Medicare and Medicaid. Why should the US be the exception?

7. 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. Grain prices during WWI had been in a bubble that makes anything we've seen since look tame. Farm income soared from $3.5 billion in 1913 to $9 billion in 1919. This, in turn, begat a bubble in land prices, which benefited from a positive feedback loop with the arrival of the tractor (15,000 in 1914 to 1 million in 1930) 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 1930 for the banking lobby in 2008 and FDR himself for Bernanke you get the picture. FDR confiscated private gold and personally participated in the London fixing for the price of gold on a daily basis with a view to propping up the prices of agricultural products, presaging today's buying of bonds to support the housing market. 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.

MY COMMENT: Wow. 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? It's perhaps not directly relevant to what's going on in the world, but I'm fascinated nonetheless.

8. Bernanke also had a predecessor in buying Treasuries. You guessed it, it was FDR. The US financed its wartime effort through Fed purchases of US Treasuries. The Fed carried on owning Treasuries until the early sixties, and in the necessary amount to cap interest rates. Capped interest rates (thanks to Fed-engineered rates repression), balanced budgets and inflation worked together to bring down the debt to GDP ratio from 125% to 30% over time.

MY COMMENT: I did not realise the Fed was buying Treasuries into the sixties. 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. What money he did spend on defence he spent very judiciously, on nuclear arms, which in Stockman's view won the cold war some thirty years later.

MY VIEW: Boring. Also, I'm reading "Balance" by Hubbard and Kane and their numbers highlight that as a percent of GDP defence actually has shrunk a fair bit since Ike was president.

10. Nixon ended the gold standard because he did not want to lose the 1972 election same way he'd lost to Kennedy in 1960.

MY VIEW: Perhaps. 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. By 1970 there just wasn't enough gold to go around to sensibly provide a backbone for the financial system of the world economy, while still trading at a price retaining some type of relation to its commercial value. Nixon was the president whose fate it was to break that link while doing what every politician in the history has done, which is to buy the public's approval with tax dollars. Dunno, maybe one day we'll do a monetary standard with fresh water or something. 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.

11. 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.

MY VIEW: Boring. 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. But I do like the point that Bush 41 and 43 would not have been able to conduct their wars of choice without Reagan's re-armament campaign.

12. Cheap printed money from Greenspan and Bernanke's Fed, along with Friedmanesque freshwater free-market ideology fuelled speculative finance. 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 1998. In turn, Greenspan's response to the 1998 debacle guaranteed the final blowup of the NASDAQ.

MY VIEW: Futures are margined. Even if all collateral is pledged, say, three times (and even today it isn't) it is unthinkable that financial futures can be anything but part of the solution, rather than the problem. 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 1990, investment banking was very much a cottage industry and its participants were regularly allowed to go bust. Lehman, Shearson, Drexel spring to mind. More to the point, there's nothing wrong with trading, shorting and betting, provided there is no safety net for losers.

Frankly, I think in this instance Stockman is merely demonstrating a bias I recognise from my 20+ years in finance: he comes from the banking side of finance and he hates traders. 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. The entire derivatives thing goes over Stockman's head, frankly.

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 1.5 trillion Sterling (roughly one UK GDP). Derivatives exposure is 80 trillion Sterling. More than fifty times UK GDP. The interconnectedness is the monster. The collateral to back up all these deals (and Barclays is but one player, by no means the largest) simply does not exist. Unfortunately Goldman don't publish the equivalent number, but I'd love to see what it is. Stockman is too old to appreciate any of this. It's in reading these chapters that you appreciate the book is largely historical, rather than current.

13. Two factors allowed the Greenspan Fed to carry this policy to its illogical conclusion. The fig leaf of its inflation mandate and the battering the price of manufactured goods took when China entered the world arena. Under the cover of constantly falling prices for manufactured goods, Greenspan could keep interest rates impossibly low and still meet his inflation target, when he had the option of higher interest rates and benign deflation. This road not taken represents one of the biggest deformations.

MY VIEW: Bang on

14. The Fed is a Keynesian agent, a "prosperity-oriented politburo." Printing money is no different than digging holes and filling them back up again, but it benefits the top 1% more than anybody else. And it's about as effective. Cheap financing has landed America, which accounts for 4% of the world's population with 40% of hotel rooms. QE has done nothing for middle America, with grocery sales still 10% lower than they were in 2007.

MY VIEW: Yes, yes, yes, but you need to be more nuanced. In moderation, all of the above is good. If your argument is that you will never achieve this moderation because the "politburo" is a branch of government and will be "captured" in a quest to borrow prosperity from the future at all costs, that's another story. In principle, however, why would you not want to have the instruments to control disasters? Why is it wrong to have policy?

More to the point, suppose there was a low corporate tax rate and suppose the capital gains tax was higher than income tax, would that not have negated the entire deformation argument? That's what I took away from pages 404 to 576.

Stockman carries on, and it's all in this vein. He does not much like the 800 billion stimulus, he is systematically abusive of Larry Summers, he likes Obama (and his auto bailout and green energy policy) about as much as he likes Romney.

In his conclusion he goes on to propose that we (surprise, surprise) end the Fed, end deposit insurance, reinstate Glass Steagall, enact term limits for politicians, abolish the three entitlement programs and substitute them with means-tested programs etc. etc. Ah, and he does not ask for the gold standard. After spending 300 pages lamenting the end of "sound money" there's zero mention of gold in the conclusions. Can't disagree, but it does sort of indicate that the 300 pages were mere posturing.

With all these caveats, this is by a country mile THE BEST book currently in print if you want to understand what happened from 1992 to 2012. It's also the worst book. There is no other.

The Great Deformation is a doorstop, but it's also a landmark.
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on 8 November 2014
One of the most detailed analysis, and outspoken, indictments of the current American financial situation. Essential reading for those attempting to understand the roots of this crisis, and especially those attempting to develop policies that would help avert the massive economic meltdown the author sees looming on the horizon. More graphs of trends, combined with even greater analysis of how the financial sector has essentially grown at the expense of everyone else, would have helped. Also strange that, while the word ‘corruption’ is mentioned in the title, it is not mentioned in the 22 page index? (Neither are two other key words ‘ethics’ and ‘values’.)
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on 27 November 2013
This very timely book clearly explains where the international monetary system with fiat money and central banks has failed, exactly what lead to the banking crisis in 2008 (and earlier similar crises) and what will happen next.

I contains a history and analysis of monetary systems tried over the past couple of hundred years and clearly places the responsibility for failures where it belongs, with criminals like Nixon and false prophets like Keynes, as well as with clueless people like Bernanke.

This is an absolute must read for all politicians and economists of all persuasions, a really important document.
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on 26 June 2013
I won't go into the merits of the content of the book here, but the writing style is littered with sloppiness and cliches which irritate me as a reader and distract from the message.

The author throws numbers at the reader constantly, without sources, graphs and sometimes without appropriate context. So what if something increased 10% one year and 13% the year after that, reaching a 10 year high? Statistics do not speak for themselves. Without knowledge of the subject matter, I can't know if what he's quoting is relevant, abnormal, or proves the point it's supposed to.

The author misuses the word "literally" all the time when he means "figuratively" e.g. "Merc's S& P pits literally scorched the earth" and "During the second quarter of 2003, mortgage financings literally shot the moon". It's the exact opposite of what he means and it's absurd.

By referring to the "old-time fiscal religion" or "gospel of free markets", it sounds like he's describing laissez-faire as faith-based nonsense with no intellectual underpinning. Some people might think that, but the rest of the book suggests the author does not, so he does himself a disservice.

The author endlessly repeats the phrase "self-evidently", but almost always when making a political inference or interpretation that may be reasonable, but is far from self-evident. The phrase can be seen to be an excuse for not justifying an opinion properly.

"Needless to say" appears on almost every page. If it were truly needless to say, he should not say it.
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