Kleinknecht opens by telling us that the Reagan legacy has been devastating for America - especially ordinary Americans.Boom-and-bust cycles, obscene CEO salaries, emergence of "Lockdown America", drug-company scandals, collapsing bridges, huge government deficits, ethical absences, plummeting/stagnating wages for working people, the flight of U.S. manufacturing abroad are all products of Reagan's free-market zealotry and gutting the public sector.Reagan also pioneered the use of wedge issues like race ("welfare queens," "war on drugs").
Kleinknecht also says the book was borne of bewilderment over the myth that continues to surround the presidency of Ronald Reagan, who he characterizes as an empty suit who believed in flying saucers and allowed an astrologer to guide his presidential scheduling.We just finished a presidential campaign season marked by unseeming competition among Republican aspirants to wrap themselves in the Reagan mantle.
Some portions of "The Man Who Sold the World" are missing credible documentation; others blame Reagan for actions that only began during his leadership and were extended by Bush I and II, and Clinton.His 1987 appointment of Alan Greenspan (Mr. Bubbles) to head the Federal Reserve may have been Reagan's worst, given Greenspan's key role in the dot.com and housing bubbles, but we cannot forget he was reappointed again and again by other presidents until 2006.Deregulation of airlines and trucking are also attacked, though undertaken by Carter.And finally, Kleinknecht misses some important additional Reagan actions - eg. undermining Carter's fuel economy and alternative energy initiatives, and the whole Iran-Contra fiasco.Nonetheless, the book still is an important contribution.
Reagan was well known for stories not quite rooted in fact, and his statistics were similarly also sometimes loose.This included his war on regulation and Murray Weidenbaum's (became Reagan's Chairman of Economic Advisers) conclusion that federal regulations cost the economy $103 billion/year in 1978, including $666/car.The Bureau of Labor Statistics later repudiated some of Weidenbaum's methodology and a subsequent year-long Wall St. Journal sponsored study of the 48 largest firms vs. the six most active regulatory agencies found the regulatory impact only 1.1% ($2.6 billion).Worse yet, Weidenbaum's analysis omitted any benefits from these regulations, and Japanese firms spent more for compliance and still cost less.Unfortunately, Weidenbaum's study came first, got all the press, and inspired the administration's weakening of regulations through reducing enforcement funds and installing leaders who didn't believe in regulation.
The finance industry particularly benefited.By the beginning of the 1980s, an estimated two-thirds of the nation's thrifts were losing money, and thousands virtually insolvent.Regulatory relief including increasing FDIC coverage from $40,000 to $100,000, allowing developers to own thrifts and borrow from them, loosening accounting practices to boost net worth, and freeing them from investment restrictions.The result - the 1989 S&L debacle that required $150 billion in taxpayer bailouts.
Kleinknecht believes the rapid rise of M&A activity under Reagan's relaxed anti-trust enforcement became a prime cause of our manufacturing decline.CEOs lived in fear of 90%-leveraged LBOs using the firm's own assets as collateral, instead of focusing on customers and the Japanese.The M&A/LBO debts incurred ($33+ billion in 1981, plus at least another $70 billion tied up in merger-related loan commitments) hampered firms from investing in new equipment and made them more vulnerable to downturns.Between 1980-86, M&A went from 1,565 ($33 billion) to $4,323 ($204 billion).
Business tax cuts, instead of spurring new investment in equipment, were largely used for M&A as well. Kleinknecht cites the example of G.E. - paid no income tax the first three years of Reagan, received $283 million in rebates (despite pretax profits exceeding $6.5 billion), while shedding 50,000 jobs through layoffs, attrition, and selling subsidiaries.Meanwhile, it acquired RCA and NBC, among others.
A number of credible studies document long-term stock losses by the majority of merged companies.A Wall St. Journal study in 2002 found the stocks of the 50 biggest corporate acquirers fell 3X the DJIA.
Kleinknecht's data on "Lockdown America" is quite limited, consisting of data from New Jersey.In 1980 it had 76 prison inmates per 100,000 population, and 331 in 2002; meanwhile, violent crime increased.
Overall, "The Man Who Sold the World" is important reading.
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The Man Who Sold the World: Ronald Reagan and the Betrayal of Main Street America (Hardcover)
This is an outstanding textbook on how to master the intricacies of a structured finance (especially, home-equity ABS) deal. It teaches ABS from several angles: modeling (chapter 1-4), structuring (chatper 5), and ABS analytics (chapter 6).
