The Great Deformation (103 page)

This is pure Keynesian blather, but Hubbard was not yet done. In an article co-authored in late 2004 with William Dudley, who was then chief economist at Goldman and is now Bernanke's right-hand money printer as president of the New York Fed, he averred that due to the Fed's unleashing of the Wall Street casino there had been a “dramatic decline in the cyclical volatility of housing.”

Say again! It is not surprising that Hubbard did not see the most violent collapse of housing in American history looming just around the corner: he was a full-fledged proponent of bubble finance. Accordingly, Hubbard and Dudley had found “100 percent financing to purchase a home” to be a key contributor to the great prosperity purportedly under way at the time. An exasperated blogger rightly tagged this as “the mortgage bankers' equivalent of ‘The Anarchist Cookbook'—a recipe for disaster.”

Cookbook in hand, however, Hubbard kept candidate Romney firmly planted in the Wall Street–Fed consensus. Consequently, voters did not hear a word about the true menace stalking the land; namely, that their livelihoods, future prospects, and efficacy as citizens of American democracy were under relentless assault from the monetary politburo which inhabits the Eccles Building.

Here was a chance, in the first election after the dust had settled from the Bernanke-Paulson-instigated BlackBerry Panic, to call out the real source of what Romney appropriately called the “failing” American economy. Romney could have blasted financial repression as a gift to Wall Street speculators that undermined honest capital markets, crushed Main Street savers, battered low-and middle-income families with soaring food and energy costs, and enabled the nation to live far beyond it means while putting it in hock to the rest of the world by $8 trillion.

Instead, Romney-Ryan blamed it all on Obama, notwithstanding the inescapable facts—obvious to the overwhelming share of voters—that the terrifying meltdown on Wall Street and the associated sharp plunge of the American economy had occurred on the Republican watch of George W. Bush. So by their silence on the Fed and their defense of failed free lunch fiscal policies, the Romney-Ryan ticket failed to give the electorate a credible reason to abandon an incumbent who drank his Keynesian Kool-Aid straight up. Under the second Obama administration, therefore, big deficits and massive money printing will occur as a matter of policy choice,
not simply as the default outcome that was implicit in the half-basked nostrums offered by Romney-Ryan.

Historians may someday wonder how the conservative party failed so badly when the very future of free market capitalism and fiscal solvency were at stake. The short answer would be that after three decades the entire party had become lost in the false world of bubble finance.

In that regard, a considerable share of blame could be assigned to the GOP's final rash of crypto-Keynesian economic advisors like Hubbard and his successor, Greg Mankiw of Harvard, or Ed Lazear of Stanford. As Bush's last CEA chairman, Lazear had insisted in May 2008 that “the data are pretty clear that we are not in a recession.” Needless to say, when the Wall Street meltdown struck with cyclonic force a few months later Lazear did not have the foggiest notion of why it happened. He just rolled over and watched Bernanke and Paulson stampede Washington into the BlackBerry Panic.

But ultimately the GOP is the party of businessmen and financiers, and it was they who in Jim Carrey–like fashion had spent decades in a great and artificial financial bubble, the economic equivalent of
The Truman Show
. Accordingly, they did not know why Wall Street collapsed in September 2008 and didn't recognize that the American economy was dangerously leveraged at 3.6X national income. And most especially they did not perceive that the violent booms and busts on Wall Street had been the handiwork of a destructive régime of monetary central planning.

So failing to comprehend the crumbling world outside the bubble, they embraced a content-free revival of Reaganite rhetoric that was a veritable caricature of what Republican governments have actually done. They decried excessive regulation when economic regulation had peaked in the 1970s and had been rolled back ever since. In fact, the only thing of material import which had happened on the regulatory front since the Gipper's time had been the disastrous “deregulation” of banks, licensed wards of the state which had never been free enterprises in the first place.

Republican governments of the Bush era had also brought federal spending to the highest share of GDP since WWII and turned the small surpluses of the Clinton period into a raging torrent of red ink. Self-evidently, after the mad-cap tax cutting of the Bush period the federal tax burden had been reduced to the lowest level in fifty years. In short, the Republican mantra that the nation was overtaxed and overregulated was utterly disconnected from the economic facts, as were its tirades against the deficit.

THE JIM CARREY OF BUBBLE FINANCE

Willard M. Romney did not see this, and for a compelling reason: he was the Jim Carrey of bubble finance. He had made a fortune during a twenty-year
career in the studio, riding the wave machines of debt and leveraged speculation enabled and powered up by the Fed. Not surprisingly, Romney mistook the windfall riches garnered in the great hall of bubble finance for the fruits of honest enterprise on the free market, and was therefore blind to the profound monetary and financial disorders of the American economy.

Accordingly, his presidential campaign readily adopted the content-free Reaganite rhetoric against taxes, Big Government, regulation, and deficits. As Romney saw it, there was nothing wrong with the nation's economy which couldn't be fixed by a can-do businessman in the Oval Office who knew what it takes to rejuvenate the “job creators,” impose fiscal discipline, and unleash the capitalist energies.

In truth, this was pure political pettifoggery that would fix nothing, but it did underscore why Romney's successful sojourn in the financial bubble had made him uniquely unfit to be the GOP standard-bearer. He had been a big winner because the state and its central banking branch had failed miserably. What was needed was not the unleashing of the battered and impaired remnants of free market capitalism, but a drastic throttling of the state's engines of false prosperity; that is, an end to the madness of the Fed's financial repression and rampage of bond buying coupled with the imposition of taxes on the electorate for every dollar of federal spending that the legislature was unwilling to cut.

A return to sound money policies, of course, would bring ruin to the 1 percent, and years of painful austerity to Main Street. Needless to say, the masses would not have cottoned to such a program, especially if championed by one of the baby boom's biggest lottery winners. More importantly, Wall Street would have gagged and muffled their candidate before he could make a single utterance about cleaning house in the Eccles Building or taxing capital gains at the same rate as wage earners.

In fact, keeping the candidate safely enveloped in a fog of Reaganite rhetoric was exactly what Wall Street–oriented advisors like H. Glenn Hubbard excelled at. After all, the enterprising Professor Hubbard had been paid to investigate the operations of Countrywide Financial, for example, and found them laudatory. So it was plain that he could be counted on to keep the campaign looking with favor on gutting the Volcker Rule, keeping the giant Wall Street banks free from the threat of dismantlement, and empowering the monetary central planners to keep the juices flowing from the Eccles Building.

As seen in earlier chapters, bubble finance created a vast arena of financial engineering in which debt-fueled buyouts, buybacks, and M&A takeovers systematically channeled wealth and income to the very top of
the economic ladder. But these windfalls did not foster capitalist growth and wealth creation on the free market; they simply extracted unearned rents from the Wall Street casino, and it was in the leveraged buyout business—where Romney made his fortune—that the most spectacular cases of this capture occurred.

So when all was said and done, Willard “Mitt” Romney was a creature of the great deformation of finance that had been unleashed by the administration in which his father had served as secretary of HUD. History has left few clues about what George Romney thought about Nixon's final destruction of the gold dollar, but his son's business history documents in spades how Nixon's actions eventually destroyed the free market in finance and fostered an unsustainable era of debt-fueled GDP growth and speculation-driven accumulation of wealth by the 1 percent.

That Mitt Romney turned out to be the conservative party's candidate for president in 2012 is ironic in the extreme. As detailed below, Romney's winnings from bubble finance during his years at Bain Capital were so preposterously impossible in an honest free market that it is no wonder that his 2012 campaign amounted to one giant platitude. He honestly thought his experience doing leveraged buyouts could show the way forward to ameliorate the nation's economic ills. In fact, Romney had been an energetic agent of the very financialization process that had generated the economic failures against which he campaigned.

BAIN IN THE BUBBLE

The Bain Capital that Mitt Romney built was a product of the Great Deformation. Like much of Wall Street, it garnered fabulous winnings through leveraged speculation in financial markets which have been perverted and deformed by three decades of money printing by the Fed. So Bain's billions of profits were not rewards for capitalist creation—they were mainly unearned windfalls collected from gambling in markets which were rigged to rise.

That is why Mitt Romney's claim that his essential qualification to be president was grounded in his fifteen years as head of Bain Capital clashed so discordantly with the truth. It was also why Bain's fulsome returns, which averaged more than 50 percent annually during Romney's 1984–1999 tenure, were not evidence that he had learned the true secrets of how to grow the economy and create jobs or that he had been uniquely prepped for the task of restarting the nation's sputtering engines of capitalism.

In fact, Mitt Romney was not a capitalist businessman; like the other LBO kings, he was a master financial speculator who bought, sold, flipped, and stripped businesses, but he did not build enterprises the old-fashioned way:
out of inspiration, perspiration, and a long slog on the free market fostering a new product, service, or process of production. Instead, he had spent his fifteen years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and caste-offs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster, the better.

This is what Romney's work consisted of during his stint in the Truman Show. It is also the modus operandi of the leveraged buyout business, and in an honest free market economy there wouldn't be much scope for it because it creates little of economic value. But as has been seen, we have a rigged system—a régime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise. And I had learned about this firsthand during seventeen years doing leveraged buyouts at one of the pioneering private equity houses, Blackstone, and then my own firm. The whole business was about maximizing debt, extracting cash, cutting head-counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest profit exit possible. Occasionally, we did invest in genuine growth companies, but without cheap debt and deep tax subsides, most deals would not make economic sense.

As shown earlier, the waxing and waning of the artificially swollen LBO business has been perfectly correlated with the bubbles and busts emanating from the Fed—so timing is the heart of the business. In that respect, Romney's tenure says it all: it was almost exactly coterminous with the first great Greenspan bubble which crested at the turn of the century and ended in the thundering stock market crash of 2000–2002. The credentials that Romney proffered as evidence of his business acumen, in fact, mainly show that he hung around the basket during the greatest bull market in recorded history. And that's why heralding Romney's record at Bain was so completely perverse. The record was actually all about the utter unfairness of windfall riches obtained under our anti–free market régime of bubble finance.

RIP VAN ROMNEY

When Romney opened the doors to Bain Capital in 1984, the S&P 500 stood at 160. By the time he answered the call to duty in Salt Lake City in early 1999, it had gone parabolic and reached 1260. This meant that had a modern Rip Van Winkle bought the S&P 500 index and held it through the fifteen
years in question, the annual return (with dividends) would have been a spectacular 17 percent. Bain did considerably better, of course, but the reason wasn't business acumen.

The secret was leverage, luck, inside baseball, and the peculiar asymmetrical dynamics of the leveraged gambling carried on by private equity shops. As previously demonstrated, LBO funds are invested as equity at the bottom of a company's capital structure, which means that the lenders who provide 80 to 90 percent of the capital have no recourse to the private equity sponsor if deals go bust. Accordingly, LBO funds can lose 1X their money on failed deals, but make 10X or even 50X on the occasional home run. During a period of rising markets, expanding valuation multiples and abundant credit, the opportunity to “average up” the home runs with the 1X losses is considerable; it can generate a spectacular portfolio outcome.