BOOK REVIEW: ‘The Great Deformation: Assessing the Blame for Who Busted the Economy: Everybody’s Guilty, Says David Stockman

Editor’s note: combining all four parts of my review of “The Great Deformation” by David A. Stockman

  • Reviewed by David M. Kinchen

 Today, May 1, is Labor Day in much of the world, especially the socialist inclined world. I wouldn’t even want to guess what it would be like today in Greece or Spain, two of the EuroZone countries that have suffered the most. I don’t love the smell of tear gas in the morning!

David Stockman, the author of “The Great Deformation: The Corruption of Capitalism in America” (PublicAffairs Books, 768 pages,  $35.00)  was the architect of the Reagan Revolution meant to restore sound money principles to the U.S. government. It failed, derailed by politics, special interests, welfare, and warfare.


In “The Great Deformation” Stockman describes how the working of free markets and democracy has long been under threat in America, and provides a nonpartisan, surprising catalog of the corrupters and defenders. His analysis overturns the assumptions of Keynesians and monetarists alike, showing how both “liberal” and “neo-conservative” interference in markets has proved damaging and often dangerous.

Over time, crony capitalism has made fools of us all, transforming Republican treasury secretaries into big government interventionists, and populist Democrat presidents into industry wrecking internationalists. Today’s national debt stands at nearly $16 trillion. Divided equally among taxpayers, each of us is $52,000 in debt. This book explains how we got here—and why this warped crony capitalism has betrayed so many of our hopes and dreams.

My position on reviewing is to read the book completely, with no exceptions. I’m making an exception: I’ve read 90 pages of this tome and skimmed much of the rest, but this review is based on the pages I’ve read. I’ll review the book in segments, but I wanted to get out a review of a vitally important book that was published April 2 before the reading public ASAP.

Stockman starts in the late summer and early fall of 2008, when Treasury Secretary Henry Paulson panicked, convincing President George W. Bush, Congress and just about everybody that AIG was too big to fail. In Stockman’s view, nobody is too big to fail, as he details in Chapter 1, “Paulson’s Folly: The Needless Rescue of AIG and Wall Street.” Failure is a good way of clearing out companies that don’t deserve to live — or to convince survivors that they have to downsize. It’s that way for the 95 percent and it should be that way for the 5 percent.


Let’s take a break and watch Jon Stewart of “The Daily Show” interview Stockman:


Here’s a brief biography of David Stockman


David Alan Stockman, born Nov. 10, 1946,  is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget. He’s a Republican, although he blames members of his party as much or  more for the collapse of the American economy.

  Stockman was  elected as a Michigan congressman in 1976 and joined the Reagan White House in 1981. Serving as budget director, he was one of the key architects of the Reagan Revolution plan to reduce taxes, cut spending, and shrink the role of government. He joined Salomon Brothers in 1985 and later became one of the early partners of the Blackstone Group. During nearly two decades at Blackstone and at a firm he founded, Heartland Industrial Partners, Stockman was a private equity investor. Born in Fort Hood, Texas, Stockman attended Michigan State University and Harvard Divinity School and then went to Washington as a congressional aide in 1970. He is the author of The Triumph of Politics


I’ve reviewed about a dozen books about the Crash of 2008 and I wanted to get the opinion of a man whose book, “The Death of Corporate Reputation”(link: I  reviewed on April 15, Jonathan Macey, a Yale University law professor and expert on corporations:

 “David Stockman is right: the economy in this country is being ruined by inept, turf-grabbing bureaucrats.  He’s also correct that steps need to be taken immediately to deal with the massive federal deficit. The good news is that these two problems can be solved simultaneously by shrinking drastically the size of the government.  The bad news is that there are no statesmen or patriots in power in Washington, only small-time pork barrel politicians who cater to special interest groups on the right as well as on the left.”

Stockman prefers the designation “5 percent” for the people who’ve hogged most of the money in the world and “95 percent” for the rest of us.  On page 68 he tells us the 5 percent hold about $40 trillion  in net worth — a $32 trillion gain over the $8 trillion they held in 1985. By contrast, the net worth 95 percent of householders at year end 2011 was just $8 trillion higher than a quarter century before. The top 5 percent have gained four times more than the bottom 95 percent in the land of the free and the home of the brave.


I came across an interesting AlterNet story about some of the folks in the 95 percent bracket, a story about nine  jobs that pay surprisingly small, including airline pilots and adjunct professors:


Surely, Stockman, Reagan’s boy wonder, would concede that we defeated the Communist peril, in part by outspending the Evil Empire. On Pages 79-86, he goes into gruesome detail about Reagan buying into Caspar Weinberger’s policy of spending whatever money he could raise for whatever department he helmed. “During his time at the Federal Trade Commission he was an enthusiastic regulator,” Stockman tells us on Page 80. “At Nixon’s White House Budget Office he became ‘Cap the Knife.’ “During his stint as Secretary of HEW in 1973-1975 its budget grew by 45 percent — the greatest two-year surge in social spending recorded at any time before or since.”

Do I or Stockman have to tell you what happened when Cap Weinberger took over the Pentagon in the Reagan Administration? Yes!  You can imagine that free-spending Weinberger ignored President Eisenhower’s warning about the “military-industrial complex” in Ike’s January 17, 1961 farewell address and you’ll be right.  On pages 72-74, Stockman details the spending of Weinberger when Stockman was the director of the Office of Management and Budget in the White House:

“When the dust finally settled,” Stockman writes on page 73 about Cap Weinberger and his warfare spending, the fiscal 1982 defense budget stood at $222 billion — a figure nearly nearly 60 percent larger than the $142 billion piñata that had been so roundly attacked during the campaign. Yet it was from this vastly  elevated prospective budget for 1982, not the allegedly deficient actual 1980 spending level, that the annual growth rate calculation was applied.”

As promised in my first installment of my review of David A. Stockman’s “The Great Deformation: The Corruption of Capitalism in America” (PublicAffairs Books) (link: I’m reviewing the book in installments. Consider this my “Ring” review, a nod at Richard Wagner’s four-part opera cycle that ends with “Gotterdammerung” (The Twilight of the Gods). By the way, the year 2013 is the bicentennial of Wagner, born in 1813.

Let’s pick up with my penultimate paragraph, which I think is worth repeating:

“When the dust finally settled,” Stockman writes on page 73 about Cap Weinberger and his warfare spending, the fiscal 1982 defense budget stood at $222 billion — a figure nearly nearly 60 percent larger than the $142 billion piñata that had been so roundly attacked during the campaign. Yet it was from this vastly  elevated prospective budget for 1982, not the allegedly deficient actual 1980 spending level, that the annual growth rate calculation was applied.”

Stockman’s book is roughly chronological, with FDR’s election coming after a solid recovery from the crash of 1929 occurring during through September 1932 as Hoover did what he did best: Nothing. Stockman writes (Page  150) that the Hoover recovery has been neglected by historians mesmerized by FDR. By September 1932  fully 50 percent of the huge collapse of industrial production since the Crash had been recovered. The steel mills of Youngstown, Pittsburgh, Gary, Cleveland, Wheeling, etc. were humming and farmers found a ready market for their  exports. Remember, 80 years ago, the U.S. was a gigantic exporter of commodities and finished products. American cars and typewriters — just to name two products — were desired the world over. Look at a movie set in, say, China in the 1930s and you’ll see Buicks and Plymouths and Corona and Remington typewriters and other American products.

What about all the bank failures, beginning in the 1920s under GOP administrations? Stockman says 12,000 banks failed from 1920-1933, but fully 10,000 of them were tiny rural banks, of the kind pictured in the movie “Bonnie and Clyde.” The big banks weren’t affected and on page 151 Stockman notes that losses from the failed banks amounted to a minuscule 2-3 percent of deposits.

The Hoover administration couldn’t stop the Smoot-Hawley Tariff bill of June 1930, which had the effect of harming America’s exporters as foreigners retaliated by raising barriers of their own. The stupidity of the human race shouldn’t surprise me after almost 75 years of living on this planet, but it never fails to do so!

Flash forward to LBJ’s attempt to fight a war in Southeast Asia with his “guns and butter” program, which Stockman calls the “turning point” (Page 112) in his “assault on sound money.” Stockman said that LBJ not only steadfastly refused to raise taxes to fight the war, he literally manhandled a Fed chairman that Stockman clearly admires, William McChesney Martin, who urged Johnson to raise taxes. I’m personally grateful for a program that Johnson pushed through in 1965, Medicare, but that’s another story.

Stockman is not happy with Richard Nixon’s economic schemes, which the author considers to be unmitigated disasters, from the naming of policies NEP: New Economic Policy, failing to realize that NEP was what Lenin called his limited attempt at capitalism in the Soviet Union in the early 1920s, to a meeting at Camp David on Aug. 15, 1971, which led to what might be called a “Gotterdammerung” — the “final destruction of sound money” (page 122).  During the first 24 months after Camp David the dollar lost almost 20 percent of its value. The Fed Chairman in NIxon’s administration was a man Stockman clearly considers inadequate, Arthur Burns, a man not up to the high standards of Martin.

Read this and weep: crude oil was selling for $1.40 a barrel in August 1971! It rose to $13 a barrel four years later and reached $40 in the last year of the Carter administration, 1980. The reason for the skyrocketing price of oil wasn’t a shortage of oil, but rather a flood of money and inflated demand, Stockman writes.

Gerald Ford gets a pat on the back for trying to be true to his fiscally  orthodox Midwestern Republicanism, and was well served by Treasury Secretary Bill Simon, a man Stockman praises for his opposition to bailouts and support of free trade. This was the era of the headline “Ford to NYC: Drop Dead” as Ford and Simon refused to bailout the financially troubled Big Apple. Ford gave it the good old college try, but his and Simon’s efforts were doomed by the “economic wreckage” left behind by Nixon.

Apres Moi, le Deluge, AKA Jimmy Carter. The less said about his disastrous one term the better.

But Stockman isn’t gentle in his treatment of Reagan, as I’ve noted above and in the first part of this review with the discussion of Cap Weinberger. From the start, Reagan was susceptible to being subverted, if indeed he was a fiscal conservative. After all, he started out as a liberal Democrat!  On pages 95 to 107 Stockman chronicles Reagan’s fiscal Waterloo, Consider the mid-chapter heading on page 95: “The 1981 Tax Bidding War: Coalition of the Bought.”

All right, I’m at Page 152, just on the verge of Stockman writing about the errors of the New Deal, programs that not only interrupted the recovery described above in the last days of the Hoover Administrtion, but prolonged the Great Depression. I’ll stop here for now. Really, this book could serve as a textbook for a two-semester economics course!

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” campaign on 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?

Continuing my multi-part review of David Stockman’s “The Great Deformation” (PublicAffairs Books, 768 pages, $35.00) with links to part 1(  part 2 ( and Part 3 (

Stockman quotes economist Paul Samuelson who dubbed FDR’s 1935 Social Security Act…a giant Ponzi scheme and is not one of those who mourns the 1999 replacement of the 1933 Glass-Steagall Act by Gramm-Leach-Bliley. In fact, Stockman says the worst aspect of Glass-Steagall — deposit insurance — was one of the few parts of Glass-Steagall  retained by Gramm-Leach-Bliley.

Stockman calls  Social Security a “Faustian bargain” that eschewed  a means test to wage replacement on a universal basis. Frankly, personally, I’m glad, because, aside from a minimal fixed pension from one of my newspapers, an amount not big enough to pay my rent, we would be homeless. Only the rich get defined benefit pensions today; the rest of us, the 95 percent in Stockman lingo, depend on 401K pensions which have been decimated by stock market losses.

The first Social Security payroll tax in 1937 was around 2 percent of wages. As the years rolled on and new programs like Medicare were added, the payroll tax is now pushing 16 percent, Stockman writes, and the current tax is not sufficient to feed the beast. It was Paul Samuelson — the Nobel Prize winning economist who wrote the textbook you probably used in Econ 101 — who called Social Security “the greatest Ponzi scheme around.”

The “Glass” in Glass-Steagall was Carter Glass of Lynchburg, VA,  born 1858, died 1946. A newspaper publisher by profession, he was Secretary of the Treasury under Woodrow Wilson and as a member of the House of Representatives played  a central role in the development of the 1913 Glass-Owen Act   that created the Federal Reserve System that’s at the core of crony capitalism.   Later elected to the Senate, he was co-sponsor of the Glass-Steagall Act of 1933, which enforced the separation of investment banking and commercial banking, and established the FDIC that Stockman hates so much.

The Steagall was Rep. Henry B. Steagall, D-Alabama, part of what Stockman calls Roosevelt’s “Hayseed Coalition,” of Democrats from the South, the Southwestern mining states, the Great Plains, the Middle Border and the West. Steagall insisted on the creation of the Federal Deposit Insurance Corp. as part of the act. More crony capitalism, in Stockman’s reading, but a necessary component to get the act passed.

The rest of Stockman’s massive book delves into the guts of crony capitalism, subprime mortgage peddling and the elements of securitization that brought Wall Street so close to self destruction. There’s more than enough for the detail minded examiner of crony capitalism.


I found  a ripped from today’s headlines that recalls parts of Stockman’s book, like the FHFA nomination referred to earlier. The latest is Obama’s nomination as Commerce Secretary of Hyatt Hotel heiress Penny Pritzker, a Chicagoan said to be worth nearly $2 billion. (link to CBS MoneyWatch story:…).


It would appear that crony capitalism is alive and well in 2013 and that Obama hopes people have forgotten — or didn’t know — Pritzker’s involvement in the subprime mortgage market that contributed mightily  to the financial meltdown of 2008.

From the MoneyWatch story:

 “Pritzker put together nearly $800 million for Obama’s presidential campaigns.

“Pritzker’s appointment shows that the administration is abandoning even a fig leaf of a relationship with labor unions — Hyatt has had many run-ins with its work force, and Pritzker herself was deeply unpopular with the Chicago Teachers Union during her tenure on the Chicago Board of Education.

“The appointment also suggests the administration is betting that people don’t care much anymore about the subprime meltdown that succeeded in bringing the world to the brink of financial ruin. Her role in the banking business may startle those not familiar with the history of the subprime meltdown. 

 “The Pritzker family, along with a partner, bought the failed Lyons Savings Bank in 1988 for $42.5 million, getting $645 million in tax credits in the process and rechristening it Superior Bank. Under Pritzker, who served on the board, Superior bought Alliance Funding, which moved aggressively into subprime lending. 

“Bert Ely, an independent banking analyst who testified about the failure of Superior, noted the garish pitch the bank was making at the time. “I remember the basic message to mortgage brokers: ‘Send us the applications that no one else will accept.’ “

“As one of the earliest pioneers of risky loans that were then bundled off and sold as securities, Superior was also one of the practice’s earliest casualties: The bank collapsed in 2001. “The kinds of lending they were doing were outrageous,” Ely said. “But what was also outrageous was that when Superior failed — there were a lot of uninsured depositors who took losses. It was more outrageous given the wealth of the family, which may have walked away without any losses.”

“Tim Anderson, a retired banking consultant who has written and testified about the failure of Superior, said Penny Pritzker played a direct role in persuading people to park their money in a bank that was taking wild-eyed risks. He points to a letter she wrote in May 2001 to bank employees and managers, assuring them that the bank was being recapitalized. But while that pledge of support may have convinced people that the bank was sound, the recapitalization never occurred. In fact, the bank failed two months later.

“The letter was also indicative of the approach the bank was taking, and of Pritzker’s hands-on role in strategy.  “Our commitment to subprime has never been stronger,” she wrote.

“Anderson said that when Pritzker goes before the Senate to defend her nomination, these questions should be front and center. ‘What has not been focused on until now is what was Penny’s role in the subprime mortgage meltdown,’ he said. ‘It was the Pritzkers who got investment-grade ratings on subprime debt. It was the Pritzkers who were into subprime lending long before Wells Fargo, Countrywide and Washington Mutual. They were in the forefront of the subprime fiasco, but they have never been held accountable.

“The Senate needs to ask her what was her role in the subprime mess. Not her family’s, but hers.”


No further comment needed. Prtizker’s involvement in subprime mortgages isn’t mentioned in Stockman’s book, but other major subprime players like Roland Arnall’s Ameriquest Mortgage are (pages 421ff).


So there you have it: My four-part review, as impressive to me as the Ring cycle is to opera lovers. Consider the Fat Lady has sung and taken her bows.  Stockman’s book is worth a close study and it will also serve as an important reference work for years to come. I can’t recommend “The Great Deformation” too highly.

Publisher’s website:




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