US Corporate State
Llewellyn H. Rockwell, Jr.
It didn’t take
long for opponents of the market to pounce after the events of 2008.
The crash was said to prove how destructive "unregulated capitalism"
could be and how dangerous its supporters were – after all, free-marketeers
opposed the bailouts, which had allegedly saved Americans from another
Great Deformation, David Stockman – former US congressman
and budget director under Ronald Reagan – tells the story of the
recent crisis, and takes direct aim at the conventional wisdom that
credits government policy and Ben Bernanke with rescuing Americans
from another Great Depression. In this he has made a seminal contribution.
But he does much more than this. He offers a sweeping, revisionist
account of US economic history from the New Deal to the present.
He refutes widely held myths about the Reagan years and the demise
of the Soviet Union. He covers the growth and expansion of the warfare
state. He shows precisely how the Fed enriches the powerful and
shelters them from free markets. He demonstrates the flimsiness
of the present so-called recovery. Above all, he shows that attempts
to blame our economic problems on "capitalism" are preposterous,
and reveal a complete lack of understanding of how the economy has
been deformed over the past several decades.
Deformation takes on the stock arguments in favor of the bailouts
that we heard in 2008 and which constitute the conventional wisdom
even today. A "contagion effect" would spread the financial
crisis throughout the economy, well beyond the confines of a few
Wall Street firms, we were told. Without bailouts, payroll would
not be met. ATMs would go dark. Wise policy decisions by the Treasury
and the Fed prevented these and other nightmare scenarios, and staved
off a second Great Depression.
of AIG, for example, was carried out against a backdrop of utter
hysteria. AIG was bailed out in order to protect Main Street, the
public was told, but virtually none of AIG’s busted CDS insurance
was held by Main Street banks. Even on Wall Street the effects were
confined to about a dozen firms, every one of which had ample cushion
for absorbing the losses. Thanks to the bailout, they did not take
one dollar in such losses. "The bailout," says Stockman,
"was all about protecting short-term earnings and current-year
executive and trader bonuses."
Ten years earlier,
the Fed had sent a clear enough signal of its future policy when
it arranged for a bailout of a hedge fund called Long Term Capital
Management (LTCM). If this firm was to be bailed out, Wall
Street concluded, then there was no limit to the madness the Fed
would backstop with easy money.
Stockman, was "an egregious financial train wreck that had
amassed leverage ratios of 100 to 1 in order to fund giant speculative
bets in currency, equity, bond, and derivatives markets around the
globe. The sheer recklessness and scale of LTCM’s speculations had
no parallel in American financial history…. LTCM stunk to high heaven,
and had absolutely no claim on public authority, resources, or even
When the S&P
500 soared by 50 percent over the next fifteen months, this was
not a sign that American companies were seeing their profit outlooks
increase by half. It instead indicated a confidence on Wall Street
that the Fed would prevent investment errors from receiving the
usual free-market punishment. Under this "ersatz capitalism,"
stock market averages reflected "expected monetary juice from
the central bank, not anticipated growth of profits from free-market
It wasn’t just
specific firms that would enjoy Fed largesse under chairmen Alan
Greenspan and Ben Bernanke; it was the stock market itself. According
to Stockman, Fed policy came to focus on the "wealth effect":
if the Fed pushed stock prices higher, Americans would feel wealthier
and would be likely to spend and borrow more, thereby stimulating
approach, in turn, practically compelled the bailouts that were
one day to come. Anything that might send stock prices lower would
frustrate the wealth effect. So the system had to be propped up
by whatever means necessary.
What does this
policy have to show for itself? Stockman gives the answer:
If the monetary
central planners have been trying to create jobs through the roundabout
method of "wealth effects," they ought to be profoundly
embarrassed by their incompetence. The only thing that has happened
on the job-creation front over the last decade is a massive expansion
of the bedpan and diploma mill brigade; that is, employment in
nursing homes, hospitals, home health agencies, and for-profit
colleges. Indeed, the HES complex accounts for the totality of
American job creation since the late 1990s.
the number of breadwinner jobs did not increase at all between January
2000 and January 2007, remaining at 71.8 million. The booms in housing,
the stock market, and household consumption had only this grim statistic
to show for themselves. When we consider the entire twelve-year
period beginning in the year 2000, there has been a net gain of
18,000 jobs per month – one-eighth of the growth rate in the labor
In the wake
of the crash, the Fed has continued to gin up the stock market.
By September 2012 the S&P had increased by 115 percent over
its lows during the bust. Of the 5.6 million breadwinner jobs lost
during the correction, only 200,000 had been restored by then. And
during the vaunted recovery, American households spent $30 billion
less on food and groceries in the fall of 2012 than they did during
the same period in 2007.
emergence of enormous budget deficits in recent years, Stockman
explains, simply made manifest what the bubble conditions of the
Bush years had concealed. The phony wealth of the housing and consumption
booms temporarily lowered the amount of money spent on safety-net
programs, and temporarily increased the amount of tax revenue received
by the government. With this false prosperity abating, the true
deficit, which had simply been suppressed by these temporary factors,
began to appear.
the Fed had assured us that the United States was experiencing genuine
prosperity. "Flooding Wall Street with easy money," Stockman
writes, the Fed
saw the stock
averages soar and pronounced itself pleased with the resulting
"wealth effects." Turning the nation’s homes into debt-dispensing
ATMs, it witnessed a household consumption spree and marveled
that the "incoming" macroeconomic data was better than
expected. That these deformations were mistaken for prosperity
and sustainable economic growth gives witness to the everlasting
folly of the monetary doctrines now in vogue in the Eccles Building.
discusses the fiscal condition of the U.S. government. Part of that
history takes him through the Reagan military buildup. Stockman’s
isn’t the story you heard at the Republican conventions of the 1980s.
The real story is as you suspected: a feeding frenzy of arbitrary
and irrelevant programs which, once begun, could be stopped only
with great difficulty if at all, given the jobs that depended on
But at least
this buildup brought about the collapse of the Soviet Union, right?
Stockman doesn’t buy it. "The $3.5 trillion (2005$) spent on
defense during the Gipper’s term did not cause the Kremlin to raise
the white flag of surrender. Virtually none of it was spent on programs
which threatened Soviet security or undermined its strategic nuclear
At the heart
of the Reagan defense buildup…was a great double shuffle. The
war drums were sounding a strategic nuclear threat that virtually
imperiled American civilization. Yet the money was actually being
allocated to tanks, amphibious landing craft, close air support
helicopters, and a vast conventional armada of ships and planes.
were of little use in the existing nuclear standoff, but were
well suited to imperialistic missions of invasion and occupation.
Ironically, therefore, the Reagan defense buildup was justified
by an Evil Empire that was rapidly fading but was eventually used
to launch elective wars against an Axis of Evil which didn’t even
actually bring the Soviet Union down was its command economy itself
– a point, Stockman notes, that libertarian economists had been
making for some time. Neoconservatives, on the other hand, advanced
ludicrous claims about Soviet capabilities and the Soviet economy
at a time when its decrepitude should have been obvious to everyone.
These inflated claims about the regime’s enemies continued to be
standard practice for the neocons long after the Reagan years were
To do it justice,
The Great Deformation really requires two or three reviews.
One could be devoted just to Stockman’s striking analysis of the
New Deal. Stockman advances and then defends these and other arguments:
the banking system had stabilized well before FDR’s ill-advised
"bank holiday"; the economy had already turned the corner
before FDR’s accession and worsened again as a result of FDR’s conduct
during the interregnum; the New Deal was not a coherent program
of Keynesian demand stimulus, so it makes no sense for Keynesians
to draw lessons from it; the 1937 "depression within the Depression"
was not caused by fiscal retrenchment; and FDR’s primary legacy
is not the economic recovery, which would have occurred faster without
him, but rather the impetus he gave to crony capitalism in one sector
of the economy after another.
You may have
gathered that The Great Deformation must be a long book.
It is. But its subject matter is so interesting, and its prose style
so lively and engaging, that you will hardly notice the pages going
target of Stockman’s book is just about everyone in the political
and media establishments. Left-liberal opinion molders – defenders
of the common man, they would have us believe – supported the bailouts
in overwhelming numbers. Herman Cain, meanwhile, lectured "free-market
purists" for opposing TARP, and virtually the entire slate
of GOP candidates in 2012 had supported it. Both sides, in tandem
with the official media, repeated the regime’s scare stories without
cavil. And both sides could think of nothing but good things to
say about how the Fed had managed the economy for the past quarter
The free market
stands exonerated of the charges hurled by the state and its allies.
Thanks to The
Great Deformation, not a shred of the regime’s propaganda is
left standing. This is truly the book we have been waiting for,
and we owe David Stockman a great debt.
H. Rockwell, Jr. [send him
mail], former editorial assistant to Ludwig von Mises and congressional
chief of staff to Ron Paul, is founder and chairman of the Mises
Institute, executor for the estate of Murray N. Rothbard, and
editor of LewRockwell.com.
© 2013 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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