Current debates about economic crises typically focus on the role that public debt and debt-fueled public spending play in economic growth. This illuminating and provocative work shows that it is the rapid expansion of private rather than public debt that constrains growth and sparks economic calamities like the financial crisis of 2008.
Relying on the findings of a team of economists, credit expert Richard Vague argues that the Great Depression of the 1930s, the economic collapse of the past decade, and many other sharp downturns around the world were all preceded by a spike in privately-held debt. Vague presents an algorithm for predicting crises and argues that China may soon face disaster. Since American debt levels have not declined significantly since 2008, Vague believes that economic growth in the United States will suffer unless banks embrace a policy of debt restructuring.
All informed citizens, but especially those interested in economic policy and history, will want to contend with Vague's distressing arguments and evidence.
The book is published by University of Pennsylvania Press.
©2014 University of Pennnsylvania Press (P)2015 Redwood Audiobooks
"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)
"[Y]ou 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)
"If you want to understand why financial crises occur, read The Next Economic Disaster." (Liaquat Ahamed, author of Lords of Finance: The Bankers Who Broke the World)
... I'm under the impression that the solution here is basically a few accounting adjustments. If it was that straightforward, were all these bubbles and crashes, lo these last 400 years, a lot simpler than we thought? I admire the author's good intentions. The explanations of the problems at the outset were also good. Maybe it's just me -- but I can't see how this would prevent people engineering new ways to fall into the same ditch again, as they seem prone to do.
I'm more inclined to go with what is being tried -- macro-prudential regulation to be sure systemically important firms are identified and watched, and forced to have a more sound financial and risk management structure. And if they do crash, a fast-track way to get control of them and do a resolution. That is, if it isn't all undone in the next couple years, which I think, politically, is quite possible. Then it's off the races again. But maybe it would be anyway, people being so inclined to run toward that ditch, and find loopholes to get there, the short-term incentives being what they are. And I don't see how this proposal changes those incentives.
After listening to the thesis that private debt caused the crashes of history. It makes total sense. The solution seems oversimplified, but I'm sure would help to have the banks have more skin the game.
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