http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html?src=me&ref=general State-Wrecked: The Corruption of Capitalism in America By DAVID A. STOCKMAN GREENWICH, Conn. The Dow Jones and Standard & Poorâs 500 indexes reached record highs on Thursday, having completely erased the losses since the stock marketâs last peak, in 2007. But instead of cheering, we should be very afraid. Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later â within a few years, I predict â this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too. Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the âbottomâ 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans. So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nationâs bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble. When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even todayâs feeble remnants of economic growth. THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, weâve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy. As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another â smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (âcleanâ energy, biotechnology) and, above all, bailing out Wall Street â they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating âdemand,â even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls. The culprits are bipartisan, though youâd never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry. Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed. Then came Lyndon B. Johnsonâs âguns and butterâ excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nationâs debt obligations by finally ending the convertibility of gold to the dollar. That one act â arguably a sin graver than Watergate â meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today. This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987. Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedmanâs penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the âGreenspan putâ â the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash â was reinforced by the Fedâs unforgivable 1998 bailout of the hedge fund Long-Term Capital Management. That Mr. Greenspanâs loose monetary policies didnât set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia. By offshoring Americaâs tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspanâs pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust. Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They â China and Japan above all â accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. Weâve been living on borrowed time â and spending Asiansâ borrowed dimes. This dynamic reinforced the Reaganite shibboleth that âdeficits donât matterâ and the fact that nearly $5 trillion of the nationâs $12 trillion in âpublicly heldâ debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan â one reason I resigned as his budget chief in 1985 â was the greatest of his many dramatic acts. It created a template for the Republicansâ utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism â for the wealthy. The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable âhot moneyâ soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled. Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Streetâs gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.