David Stockman On ‘The Great Deformation’ and Our Economic Doom

The new market record is just another bubble, but this one might finish us, David Stockman tells Daniel Gross.

Louis Lanzano/AP

Most 742-page jeremiads aren’t much fun to read. But The Great Deformation, David Stockman’s revisionist history of the past 100 years of capitalism American-style, is a spirited, occasionally gleeful skewering of many of our most widely held assumptions and most lionized figures. A former divinity student, Stockman chronicles what he views as the moral rot in the American financial system—one fueled by easy money, profligate debt, and needless government intervention. To a degree, this book is autobiographical. As a congressman, Reagan-era budget official, and private-equity executive, Stockman has lived through the booms and busts of the past half-century. He knows the world of which he writes from the inside out. And in The Great Deformation, few escape his opprobrium—current and past policymakers, Roosevelt and Reagan, Democrats and Republicans, leveraged buyout titans, and corporate CEOs. “Sundown now comes to America because sound money, free markets, and fiscal rectitude have no champion in the political arena,” Stockman writes.

He spoke with Daniel Gross about The Great Deformation.

Reading this book, it seems like your approach was less that of a historian than that of an archeologist.

Right. Economic archeology. I started reacting highly negatively to the bailouts in September 2008. The Federal Reserve was creating $600 million an hour in new money. That was a disconnect, a major leap into the unknown. And I thought the bailouts were a repudiation of everything that the Republican Party and conservatives stood for. I didn’t believe the rationalizations at the time. I started on Capitol Hill in 1970, as a young guy on the sidelines and then a congressman, then in the thick of it in the Reagan era, then on Wall Street. So this is an effort to make sense of all the experiences and encounters, of the evolution I personally witnessed. And the deeper I dug into it, the more I became convinced that the whole thing was an unnecessary panic. So I had to dig into the root causes. So I backed into the tenure of Alan Greenspan and Reagan, and all the way back to the founding of the Fed—basically a reconsideration of 20th-century economic, fiscal, and monetary policy.

You were a divinity school student. The title—The Great Deformation—and tale of the decline you describe has an Old Testament-prophet quality to it. Is this a morality tale? And is the U.S. like the Catholic Church circa 1518?

I wouldn’t carry the analogy too far. It’s not so much a comparison or wordplay on the Reformation. I do believe free markets are the only route to prosperity. But they have been so deformed and distorted and misused. This book is a polemic. It is an attempt to identify where we got off track and how one thing compounded another. It’s not meant to be any kind of a moral tract but a chronicle of where things went wrong in a practical sense. For decades now, mainstream opinion has held that the markets and capitalism are good, but they have inherent flaws and tend to wild swings in the business cycle. My argument is that we’ve so overloaded the state, including the central bank, with tasks that it is paralyzed and is caught in policies that are clearly not sustainable. In trying to solve the alleged problems of capitalism through an act of the state, we’ve ended up wrecking the state. I call it statewreck.

There’s something in here to disappoint everybody. Liberals excited at the way you take after Alan Greenspan will be chagrined at your critiques of the New Deal. And libertarians who like your critiques of the Obama stimulus probably won’t like your harsh take on Reagan.

We’re in uncharted waters here. Part of what I was trying to do was debunk what people view as the golden ages. They’ve been mythologized. Neither the Keynesian view of the 1930s nor the Reaganite view of the 1980s is relevant today.

So when was the real golden age, the last time fiscal and monetary policy was good and true?

Well it was the 1950s, under Eisenhower. I demonstrate that Eisenhower was the paragon. Eisenhower said taxes are too high, but he was still an orthodox man who believed you needed to balance the budget first and then earn the right to cut taxes—not cut taxes and hope you grow out of it. Eisenhower was the anti–Newt Gingrich of his day.

You tie modesty in fiscal affairs to a modesty in foreign and defense policy, which was a characteristic of Eisenhower-era Republicans—and notably lacking in Bush-era Republicans.

Well, Eisenhower wound down the Korean War and cut the defense budget. He really cut deeply and personally involved himself, and said he would have a balanced budget before we cut taxes. Eisenhower was the opposite of today’s military Keynesians, who say we can’t cut the defense budget because it will lead to job loss. In 1953 he said that defense spending was an inherent waste. Even a left-wing community organizer was never this eloquent on the ultimate cost of high defense spending. The warfare state is a big piece of my thinking. It disables the Republicans, who are supposed to be the conservative party, on fiscal policy.

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Did you discover any other heroes?

You have to go back to Carter Glass, a Democratic senator from Virginia. He was chairman of the banking committee in 1913, father of the Federal Reserve Act, and one of the co-authors of the Glass-Steagall Act. He was a self-taught but brilliant student of money. The Fed was meant to be a bankers’ bank. The only thing it was supposed to do was operate a discount window in which the banking system could bring good collateral to liquify them at a penalty rate if they needed cash to meet deposit withdrawals. It was the right conception, in my view.

You have harsh words for many of the people you know, and used to work with, on Wall Street and in Washington. Are you saying the problem is that the people who run the system are corrupt?

No. They’re not bad people. I hit the wall when Collins & Aikman, a company my firm invested in, collapsed. It’s only when you’re splattered out on the floor when you look up. Why did I have an automobile supplier leveraged five or six times in an industry that was dangerous? Well, it was because J.P. Morgan and Deutsche Bank wanted to hand out the money. My point in the book is that bad policy causes smart people to engage in activities that wouldn’t occur in the free market. If we didn’t have a massive bias in the tax code for debt and capital gains, and we didn’t have a monetary policy that was driving interest rates to absurdly low levels, most of this massive leveraging wouldn’t occur. I don’t hold it against someone who makes a killing. I’m saying this kind of start-stop, boom-bust monetary policy is pointless, and it’s one of the mechanisms by which windfalls are shifted to the 1 percent.

You’re still nominally a Republican. But you have some pretty harsh words for Mitt Romney, the party’s nominee for president last year.

I call the chapter “Willard M. Romney and the Truman Show of Bubble Finance.” Remember that movie? Truman didn’t know he was in an artificial world. The same holds for many private-equity people. We had a massive bubble of historic proportions. The wealth they created wasn’t due to building a new mousetrap, or a superior form of management. It was due to manic finance.

Don’t you take any heat from America’s comparative outperformance in recent years? Our economy is growing, our banks have stopped failing, the deficit is falling. It seems like our policies are working a lot better than, say, Europe’s.

I’m not trying to assess comparative performance. But I am suggesting that the short-run bounce that we’ve had is not sustainable. When the Federal Reserve has to stop buying bonds, what is going to happen to the bond markets and interest rates? The efforts to reduce the short-term deficit aren’t going to make our long-term debt problem better. You have to look at the trend, not just the economic report from the last quarter. The stock market is now where it was 13 years ago. And what’s happened in the past 13 years? Only 2 million jobs created, 17,000 per month, when we’ve needed 150,000. We’re so far gone.

So what is to be done?

Only radical surgery can save us. We need constitutional amendments for term limits, to abolish incumbency, to abolish private money in campaigns. We have to overturn Citizens United and shorten the campaign season. I also suggest a balanced-budget amendment. The Federal Reserve should just go back to just being a bankers’ bank.

But the entities that benefit from the financial system have so much power and wealth that it seems like getting even a tiny fraction of the changes you’re pushing would be difficult. How does your agenda pass in the face of their opposition?

What I’m talking about is a reasonably radical change of direction. I don’t know how to do it. I don’t think it’s possible.