BOOK REVIEW: Part 3 of Review of David Stockman’s ‘The Great Deformation’: FDR’s New Deal Establishes Precedents for Crony Capitalism, Bailouts of 21st Century

  • Reviewed by David M. Kinchen 
BOOK REVIEW: Part 3 of Review of David Stockman's 'The Great Deformation': FDR's New Deal Establishes Precedents for Crony Capitalism, Bailouts of 21st Century

  Continuing my multi-part review of David Stockman’s “The Great Deformation” (PublicAffairs Books, 768 pages, $35.00) with links to Part 1 ( and Part 2 (


Stockman is harsh in his criticism of President Franklin D. Roosevelt, whom many historians claim ended the Great Depression. He did no such thing, says Stockman, and FDR may even have prolonged the Depression through his “crank” schemes embodied in a galaxy of alphabet agencies and his poor choices in cabinet appointments, especially his Hyde Park, NY neighbor Henry Morgenthau Jr. as Treasury Secretary.

As a reporter who has covered real estate since 1970 at two metropolitan newspapers, I was particularly interested in Stockman’s dissection of Fannie Mae, created in 1938 — the year I was born.

Stockman regards this government sponsored entity (GSE) neither fish nor fowl. as an especially egregious example of crony capitalism that subverts the free markets of housing: “Fannie began life quite innocently in 1938 as an ad hoc New Deal program to boost the Depression-weakened housing market. It grew  into something  quite different: A monster that deeply deformed and corrupted the nation’s entire financial system seventy years later.”

By creating a market for 30-year fixed rate mortgages — at a time when mortgages were short term, five or ten years in duration, with variable interest rates — Fannie started the home mortgage market down a “slippery slope” that included “separating the loan origination process from the long-term servicing and ownership of the resulting mortgage, in an alleged financing ‘innovation’ that would give rise to predatory mortgage-broker boiler rooms a few generations down the road.”

That’s a pretty powerful indictment, but it’s one with which I tend to agree: The financial meltdown of 2008 was housing driven, especially with subprime mortgages and the commodification of loans facilitated by Fannie and Freddie.

Stockman piles on with his indictment of Fannie Mae: “It opened the door to the funding of home loans in the global market for  U.S. sovereign debt, rather than out of the savings deposits of local bank customers,” he writes. “This became possible because Fannie Mae took on quasi-sovereign status, meaning that investors were funding the general credit of the United States, not the specific risk of local mortgage borrowers and separate residential markets.”

The Twilight of the Gods for Fannie and Freddie, too,  came with the “panicky $6 trillion nationalization and bailout in September 2008,” Stockman writes. I found his indictment of Fannie Mae as the epitome of crony capitalism, as detailed in pages 169-172, to be on target. Canada has a thriving housing market based on local mortgages, without the GSEs — Fannie and Freddie — we seem to be so intent on keeping.

Regarding Fannie Mae and to show that no good deed goes unpunished regarding Edward DeMarco, the acting head of  the Federal Housing Finance Agency (FHFA) that exerts control over Fannie Mae and Freddie Mac, I came across this news item in Huffington Post  praising President Barack Obama’s May 1, 2013 nomination of Rep. Mel Watt (D-NC) to head FHFA:

The Huffington Post reported that just about everyone is happy with Watt’s nomination:

“Democrats and liberal groups cheered Watt, and House Minority Leader Nancy Pelosi (D-Calif.) praised the longtime lawmaker and consumer advocate. Many also expressed joy that the FHFA’s current acting chief, Edward DeMarco, may soon be shown the door.

“Sen. Elizabeth Warren (D-Mass.) called for the Senate to quickly confirm Watt “so he can get to work stabilizing shaky housing markets and helping struggling homeowners.” Until then, she said, Obama should “remove” DeMarco, in part due to what Warren called his “cold indifference to work with families struggling to save their homes.”

A career civil servant, DeMarco has returned Fannie Mae and Freddie Mac to record profitability, attempted to shrink their dominance over the U.S. housing industry, and has set the stage for a future in which they no longer exist and private capital has a greater influence over how home loans are funded.

DeMarco also has led Fannie and Freddie in their efforts to help troubled borrowers avoid foreclosure. The companies have modified more than 2.2 million mortgages since they were rescued by taxpayers in 2008.

Despite his efforts — which Massachusetts Attorney General Martha Coakley praised on Wednesday — Demarco’s refusal to allow the twin mortgage giants to forgive mortgage principal has inflamed many Democrats and caused them to demand his removal. Some groups launched a “#DumpDeMarco” campaignon Twitter, and critics have protested outside his suburban Washington home.

If Stockman and I had our way, Fannie and Freddie would disappear and the FHFA chief would be left with FHA and VA.

Next: Social Security was a gigantic federal Ponzi scheme; and who needs Glass-Steagall and deposit insurance?


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