David Stockman: What Do Poor Folk Know From Fancy Finance?

By Steve Weissman, Reader Supported News

10 April 13

oung David Stockman, the bright-eyed boy wonder who ran Ronald Reagan's Office of Management and Budget, won fame in his first year at the White House for publicly telling the truth. His highly touted "supply-side economics," he told the "Atlantic Monthly's" William Greider, was primarily "a Trojan horse," or decoy, for cutting the top tax rate for the highest earners from 70% down to 50%.

Now, with his widely discussed new book "The Great Deformation," an older Stockman returns from a lucrative, if less than stellar, career doing leveraged buyouts on Wall Street. This time he is selling new truths and half-truths, along with one overwhelming glob of magical thinking. America's future, he says, can be saved from its current evils, but only if we turn back to "free market capitalism" as it existed before President Franklin Delano Roosevelt.

Do Americans really want to go back to the dog-eat-dog, winner-take-all economic system whose mess FDR struggled to clean up by taking the United States off the gold standard and ushering in the New Deal with its beginnings of a decent social safety net? "Free market capitalism" did not work so well before that. Why would it work any better now?

Like former congressman Ron Paul, the right-wing Libertarian loner, and his son, Senator Rand Paul, a wanna-be president, Stockman is channeling “Austrian economics” as preached by Friedrich Hayek and Ludwig von Mises. Hayek and his highly polemical “On the Road to Serfdom” were spiritual guides to Reagan and Maggie Thatcher and are now required reading for Tea Party enthusiasts. The more radical Mises, Hayek's mentor back in Vienna and a Jewish refugee from the Nazis, was in 1960s America a stalwart of the rabidly right-wing John Birch Society. In his new book, Stockman mentions Mises only once, and Hayek not at all, but their anti-government, free market extremism shapes the entire argument.

Brought up in the Midwest with an old-fashioned Republican abhorrence of debt and attachment to annually balanced budgets and "sound money," preferably backed by gold, Stockman grew infatuated with the Austrians while working on the Congressional staff of the Illinois representative and later Independent presidential candidate, John Anderson. "I plunged into economics with the usual vigor," he wrote in "The Triumph of Politics," his "youthful screed" (his words) on the failure of the Reagan Revolution. "I read everything in sight, and before long I emerged a disciple of F.A. Hayek, the preeminent Austrian exponent of free market economics." Stockman later "completed his homework" by reading more of Hayek, Mises, and his American disciple, Murray Rothbard, a brilliant and amusing polymath who got just about everything half-right. Stockman has always loved a grand theory, especially one based on wishful thinking rather than cold, hard figures. As he famously admitted when he ran Reagan's budget office, "None of us really understands what's going on with all these numbers."

Most of Stockman's new truths will be old hat to readers, though he expresses them with the outrage of a former insider who feels betrayed. He reviles former Treasury secretary Hank Paulson "and his posse of eager-beaver Goldman bankers." He writes of being "shocked to read of the blatant deal making, bribing, and bullying of the troubled big banks being conducted out of the Treasury secretary's office, as if it were the M&A [Mergers and Acquisitions] department of Goldman Sachs." He was, he says, "flabbergasted when the Republican White House in September 2008 proposed the $700 billion TARP [Troubled Asset Relief Program] bailout." He "smelled a rat" when Fed chairman Ben Bernanke warned "that the Great Depression 2.0 was at hand" and "started spraying an alphabet soup of liquidity injections in every direction" in "a panicked spree of money printing that exceeded any other episode in recorded human history." And, says Stockman, "I lost it" when Treasury Secretary Paulson announced that "Washington was writing a $13 billion check to bail out General Motors." For Stockman, these were revealing moments in "the Great Deformation" of American capitalism, the "capture of the state, especially its central bank, the Federal Reserve, by crony capitalist forces deeply inimical to free markets and democracy."

Stockman is hyperbolic, to be sure, and as arrogant as an earlier Treasury secretary, Andrew Mellon, who in response to Great Depression 1.0 advised President Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate." Stockman wanted the same for the Detroit-based auto industry - "a cold bath of free market housecleaning, along with a drastic rollback of the preposterous $100,000 per year cost of UAW [United Auto Worker] jobs." Screw the social costs, and ignore what Stockman was taking home for arguably less productive work on Wall Street. "Absent the auto bailout," he wrote with his characteristic certainty, "there would have been no car shortage or loss of jobs - just a relocation from the north to the [non-unionized] South based on the rules of the free market."

Still, Stockman's outrage conveys an important kernel of truth. Whatever inner motives drove Paulson, Bernanke, Bush, or Obama, their bail-outs, TARP, and liquidity injections have greatly strengthened and further enriched the Too-Big-To-Fail bankers and other crony capitalists who created the Crisis of 2008. For most folk who have trouble understanding all the fancy finance, this new brand of capitalism works no better than the old kind that Stockman and his right-wing Libertarians keep trying to sell.

A veteran of the Berkeley Free Speech Movement and the New Left monthly Ramparts, Steve Weissman lived for many years in London, working as a magazine writer and television producer. He now lives and works in France, where he is researching a new book, "Big Money: How Global Banks, Corporations, and Speculators Rule and How To Break Their Hold."