April 24, 2013

Book Report: David Stockman's "The Great Deformation"

This is a very satisfying book.  What makes it compelling is the sense of utter "knowingness" and objectivity that pervades the analysis.  Stockman, after all, was Ronald Reagan's Budget Director before he entered the private sector (still quite young) as a Wall Street trader with Salomon Brothers, then perhaps the most respected investment house in Manhattan.  So he's seen the financial shenaningans from both sides - the Wall Street grifters, the power players in Washington, D.C. who are on the receiving end of all that corporate lobbying money (he served in the House of Representatives). He does not come at his commentary on the American economy from a partisan viewpoing; no one is spared, not even Reagan.  The book is politically agnostic.

The writing, in fact, seems to emerge from one other persona on his c.v., his years as a divinity student at Harvard.  Its tone is moralistic, and American in an old-fashioned way.  What he decries, what lies at the base of the Great Deformation, was the decision in 1971 to take the dollar completely off the gold standard, the Camp David agreement that is often called Bretton Woods II. After that, the nations of the world operated under the "floating currency contraption" that we now use. 

I don't really know what I think about the gold standard as the basis for issuing money.  There is nothing particularly "natural" about calibrating the issuance of markers for wealth (money) in terms of the amount of a metallic element with the atomic number 79 which has been found so far.  That gold is comparatively rare was the big point in its favor, I suppose.  If paper money must be "backed by gold," then an upper limit on the amount of currency that can be printed is established.  Without it, we wind up with what we have now, "currency wars" among the various central banks internationally, with the spectacle of nations seeking actively to create inflation in their economies and to devalue their currencies so that their exports are cheaper on the world market.  Japan is presently set on this course, with turbo-charged quantitative easing that makes Bernanke's money printing seem tame by comparison.

And, of course, as Stockman points out, there will always be the temptation at central banks to make up for lost growth and prosperity in a country by just printing the money that we can't "earn" otherwise.  The American housing bubble is his Exhibit A, that fantastic run-up in prices between 1998 and 2006, where the booboisie went on a mad rampage of MEW (mortgage equity withdrawals) through refinance, lines of credit and flipping of houses that went ever upward in price.  Stockman estimates that between about 2001 and 2006, about one trillion dollars per year were spilled into consumer spending by means of the house-as-piggybank. It was the era of flatscreen TVs, granite countertops, weekend buying sprees at Home Depot to plush out all that home improvement, new cars in the driveway paid for with 30-year financing on the house.  What wasn't to like?  We were rich! For a while.

 All of it was enabled by a compliant Federal Reserve (which kept benchmark interest rates in the sub-basement), the "GSE" twins, Fannie and Freddie, and Wall Street's packagers of mortgage-backed securities, along with the "ownership society" craze begun by Clinton and taken to delirious heights by Bush.

While all of this was going on, in those halcyon days of the first half of that long-gone decade, the American commoner made very little real progress on the employment front.  Wages were stagnant, the job market was moribund, and there was no actual economic reason, other than bubble finance, that the housing market should have appreciated in value (on average, 15% per year) at such an insane pace.  It wasn't as if Americans could actually afford these houses on their paychecks.  It all depended on gimmicks: low or no down payment, sketchy documentation, negative amortization, adjustable rate loans, and a central bank willing to keep interest rates at a level amenable to the Wall Street and GSE trash compactors, who smashed together all these garbage loans into tranched exotica.  No more brick & mortar banks with a loan officer (a friendly guy who looks and sounds like Jimmy Stewart) perusing your loan app in a kind and sympathetic way, appraising the likelihood that his bank, which will originate and hold the loan on its own books, will get paid.  No, now the mortgage business was turned over to coked-out grifters at Bear Stearns who needed "inventory," loans by the thousands so they could make their bonus and stay current on the Hamptons house and the prostitute/girlfriend's Manhattan apartment.

Modern America, in other words.

It was fun while it lasted.  It replaced the dot.com bubble, which tended to favor a narrower group of investors and tech entrepreneurs.  The housing bubble was far more democratic - almost everyone felt the "wealth effect."  Stockman is at pains to point out that it was all a chimera, a case of borrowing from the future and blowing the moolah now.  Now we're back to the same dead-ass job market, the same flatlining wages, and the same dismal prospects as would have existed in 2004, say, save for the distended housing bubble stretching to its gossamer thinness over the McMansion-strewn hills of America.

Bernanke, that plucky and indefatigable counterfeiter, is doing what he can to reinflate the bubble, on Wall Street and in the housing market.  He wants America to have those good feelings of being rich again, but all he seems to be doing is comforting the comfortable and leaving the afflicted as he found them.  Since he started printing money at warp speed in 2009, the top 7% of America's aristocracy have increased their net worth by 28%, while the bottom 93% have gotten nowhere at all. 

Stockman's idea is that we should probably try to do something real for a change instead of just playing financial games with interest rates and money printing.  Yeah, I guess.  That sure sounds like a lot of work, though.

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