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The Next Economic Disaster: Why It's Coming and How to Avoid It Hardcover – Illustrated, August 12, 2014
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"If you want to understand why financial crises occur, read The Next Economic Disaster. In this penetrating new book, serial entrepreneur Richard Vague succinctly documents how all financial collapses originate with too much private borrowing. In plain English, he outlines some of the steps we need to take to avoid the next cataclysm."—Liaquat Ahamed, author of Lords of Finance: The Bankers Who Broke the World
"Economists failed to predict the 2007 meltdown and they're on course to miss the next one too. As a consumer lending practitioner who saw it coming, Richard Vague's voice should not be ignored. His emphasis on the dangers of rising private household debt is a key both to the last crisis and the next."—Ed Luce, Financial Times Chief U.S. Commentator and Columnist
"We all know that too much debt is bad. But if you want to know how bad, you need to read this book. Packed with insightful analysis, it is a must-read for anyone who wants to understand how we got onto the road to financial ruin—and how to avoid the next disaster."—Megan McArdle, Bloomberg View
About the Author
- Item Weight : 10.4 ounces
- Hardcover : 104 pages
- ISBN-10 : 0812247043
- ISBN-13 : 978-0812247046
- Dimensions : 5.5 x 0.38 x 8.5 inches
- Publisher : University of Pennsylvania Press; Illustrated edition (August 12, 2014)
- Language: : English
- Best Sellers Rank: #1,079,596 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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When I first started my own investigation into the causes of the 2008 economic crisis, I had similar problems as Richard Vague. Everyone seemed focused on the minutiae of complicated mortgage derivatives as the root cause of the crisis, even though that could not explain any other crisis in the world including those in Europe and Japan. When I stumbled on a graph of private debt / gdp, my gut told me this was hugely important and still am in disbelief that more people are not discussing this angle. After downloading and reading the kindle sample, I immediately and excitedly bought the book - hoping that it would add something to this field. I am hugely disappointed that this book did not, in any way, live up to the hype described in the preface.
The preface describes him discussing his theory with dozens upon dozens of economists, some of which he could not convince. The author doesn’t name nor quote a single one of these alleged economists anywhere in the book. Instead of quoting the dozens of economists he interviewed, the author prefers to just make assertions without any rigor, quotes or evidence..
For example, the author claims that a common objection to his theory is that ‘private debt zeros out’, ie someone must be lending the money that is being borrowed. The author then goes on to describe a simple, logical story that it is the wealth inequality that explains why private debt still matters. All he did was declare a plausible hypothesis as fact - I didn’t buy this book looking for a the first plausible story the author thought up. What didn’t economists find convincing about this explanation? How does wealth inequality relate to corporate debt? What does the endogenous money model have to say about loans evening out? What does the data say, does inequality in a society make crisis more predictable? Is a more equitable society less prone to private debt causing crisis? If he knows any of these answers, he didn’t bother sharing this knowledge with us. The paragraph or two he spend dismissing this objection didn’t bother addressing any questions like these. This is just one example of the lack of rigor throughout this book.
Chapter one would have been fine if it was an interested amatuer’s blog post. It is unacceptable from a 30+ year industry professional in a $10 published, edited book. Also, this is 2014, why in a $10 ebook do I have to look up the appendix online. You can’t get an intern spend an hour to add the appendix to the ebook version?!
If chapter one was merely disappointing, chapter two as Vague coming off as a wolf in sheep’s clothing. For example, what’s the difference between promising bondholders payment over 30 years vs promising banks tax credits over 30 years? In practice, nothing. Yet according to Richard Vague, one ‘adds to our current debt load’ and the other somehow doesn’t. ‘Adding to our current debt load’ seems to be a euphemism for ‘on the balance sheet’. This is just insulting to his readers.
Vague makes some talk about how we should have nationalized the troubled banks in 2008. Yet it now seems to be too late to nationalize banks, as his plan instead seems to be double down on corporate handouts. He wants the government to pay for some of the banks underwater mortgages through tax credits, moving the liability from the individual to the taxpayer. He wants regulators to greenlight ‘loan forbearance’, which he politely calls a ‘fiction’. A more accurate term would be accounting fraud. He wants the Fed to continue to provide huge amounts of liquidity to bridge the gaps if they get into further trouble. Why was nationalization a good strategy in 2008, but in 2014 the good strategy is massive handouts and accounting fiction?
Despite Vague’s idea of handing billions in tax credits to banks, greenlighting ‘accounting fiction’, and unlimited liquidity, he spends paragraph upon paragraph addressing concerns over the moral hazard for the … borrower! I can’t make this stuff up.
To recap, Richard Vague wants to move liabilities of some of the riskiest loans from the private debtor to the taxpayer, and hide the costs off balance sheet. Then if banks are still in trouble, have regulators greenlight accounting fraud, loan as much money as necessary at 0%, and just hope that banks start becoming profitable enough to make up for the accounting ‘fiction’. Private debt has been moved from the individual to the taxpayer. As a reward for this ‘generosity’, the individual must take a huge credit hit so that if they need liquidity, it will likely be high interest credit cards, payday loans or pawn shops. ‘Accounting fiction’ likely means jail for them, and liquidity may be 100%+ annually. And this ‘solution’ still only addresses a small fraction of the ~150% private debt to GDP. There is nothing reasonable about this proposal.
In chapter three, Vague talks about his longer term ideas. This ventures in strange areas as he starts using the loanable funds model. What happened to the endogenous money model you taught us about in chapter one? If you really believe in the endogenous money model, how is increased reserve requirements going to increase the cost of loans? Even more ridiculous is that he spends *one paragraph* on bankruptcy reform - one paragraph in the entire book!
I have more thoughts on this book, but this review is long enough and I want to end on a positive note. First, thank you for putting out information on this important topic. It’s great that you were able to step outside the economic orthodoxy. There are a few really good insights in this book, I especially like how you think about GDP as a concept. I like that an international perspective was taken (though I wished for more on Canada and Australia especially).
Here are my suggestions for Richard Vague. Fire your editor, it’s at least partly their fault this was published in its current form. Get an editor that will push you hard, perhaps also get a co-author. Re-assess your dozens upon dozens of consultations with your economists, and tell us in more detail what they had to say. Include names and quotes. Get outside the echo chamber that convinced you that further bank handouts are an appropriate solution going forward. Please, this topic is too important for such a weak effort.
I used Z.1 Financial Accounts of the United States, First Quarter 2015 for Homeowner and Commercial Debt, D.3.
GDP was BEA Q2 2015 for Current GDP.
2009 - 2014, 5 year "trigger" book : -10 percent.
The book 18 percent was passed several years back.
2009: 164 percent
2014: 147 percent
5 year average Household and Commercial Debt / 5 year average Current GDP 2009 - 2014 inclusive: 149 percent
2014 same: 147 percent.
150 percent was the book 90 percent chance of an economic crash given the 18 percent "trigger".
Slight deleveraging from the book 2007 event.
Without a doubt, a repeat of the Crash of 1929 was avoided by the Fed and TARP.
Since then, Household and Commercial debt remains at a high level and GDP growth is anemic.
Additionally Household debt to Disposable income is 93 percent meaning consumers are leveraged out but well below the 133 percent of 2008.
My method was not precisely as in the book but captures the Debt to GDP issue.
Post your result.
Unfortunately the book also has many weaknesses. One is that the many empirical illustrations that the author refers to in the book’s text (and are important to his argument) are not included in the book but must be examined via a website. A second problem is that there is no explanation of why debt may increase in the spurts he describes that lead to banking/liquidity crises. On the flip sides he also does not elaborate on why deleveraging occurs (unlike Dr. Koo in his books).
The third and most important weakness is the solution that the author presents to getting an economy out of a post liquidity/banking bubble burst. That is a government subsidized debt forgiveness program that would be geared, primarily, to the mortgage market. According to the author, who emphasizes this would be a one off event (considering the real political world it is hard to believe this assumption would be credible), this would lead to a recovery. Unfortunately the author does not discuss how exactly this would happen. It may decrease the time required to deleverage but why would it be expected that this would lead us out of slow (or no) growth period during the interim deleveraging period? The author does not answer this question nor provide any empirical evidence to support why it would be the case. Dr. Koo, in his books, is quite explicit in his views (strongly argued) that it would be hard to imagine that this would happen during the interim deleveraging period.
That is why Dr. Koo, as well as the majority of mainstream economists, emphasize the need for expansionary fiscal policy during this interim period. Mr. Vague, the author, contends that such an expansionary fiscal policy is not a logical solution (page 53 of book). This, he contends, is for 3 reasons. One is that “the private market is generally a better allocator of capital” (p. 53). True, but his debt relief program would also lead to capital misallocations, especially if it were known that it would not be a one-off event. The second reason is that “quality of spending matters and is more often than not compromised in these efforts” (p.53). Again, quality is important but why would it be expected that there would be any increase in private sector spending resulting from debt forgiveness? This is a very problematic assumption that Mr. Vague does not argue persuasively either theoretically or empirically. All that decrease in debt resulting from the subsidized write-down in debt (which may not even be 100% of debt – the author does not discuss how large this should be) could be used to further pay down debt or be hoarded (i.e., not spent). Mr. Vague’s third critique of traditional expansionary fiscal policy is that its “most notable drawback … is that it results in higher government debt to GDP” (p.53). Unfortunately Mr. Vague’s subsidized debt write-off program also leads to higher federal government debt. He does not answer the question of why this would not be the case.
In short, a book with one notable reason to read (rapid increases in private debt over a five years and a level of private debt at 150% of GDP has historically lead to banking/liquidity crises in the past) but little more. That, however, more than justifies the hour to hour and a half that it takes to read this book.
Top reviews from other countries
In short, it is lack of income in people's pockets which is the problem. Hitherto, for the last 35 years, debt has supplemented the income shortfall. The trick no longer works. Kicking the can down the road only works for so long.