Richard Vague, the marketing mogul turned Philly investor and Penn gene-therapy research backer, has energy for many problems.
His new book, A Brief History of Doom: 200 Years of Financial Crisis (University of Pennsylvania Press), written with help from economists in several companies and a platoon of writers, makes a persuasive case that the relentless inflation of private debt -- consumer and business borrowing, far larger than government debt -- is what mostly feeds our predictable cycles of exuberant growth followed by commercial decline, bankruptcy, misery, and political unrest.
Written by a practical businessman who made a fortune building up airline-miles credit card programs and other borrowing inducements, the book snappily explores major crises over the past two centuries in the U.S., England, France, Germany, China, and Japan, including the Great Depression.
It is an antidote to the recent Alan Greenspan-Adrian Woolridge book, Capitalism in America: A History, which treats the dry government drama of “the national debt” -- government borrowing -- as the world’s moving force, relegating the tide of home and workplace finance that intimately affects people as mere symptoms.
But Vague leaves his readers to wonder whether anything can be done. If this cycle is, as he suggests, human nature, what good is knowing, except to encourage us to revert to the saving natures of our Depression-era grandparents -- or inspire speculators to find ways to profit from the next blowup?
After he jammed the Shakespeare & Co. bookstore on Walnut Street for a brief talk on May 21, I asked the Society Hill resident, a registered Independent who has donated to candidates of both parties , and talked about running for president someday, what he would have politicians do about private debt.
Does he back liberal loan-forgiveness schemes? Yes, but with conditions.
“For example, I’m in favor of allowing banks to forgive principal on an underwater mortgage in an extraordinary period like 2010, and would give them an extended period to write off the loss they would incur in doing so," says Vague.
But those breaks should have a price -- or who would pay back any loan? "The borrower who gets forgiveness of principal [should] give something in exchange — for example, they could be required to give the lender an equity participation certificate that would entitle the lender to 50 percent of the gain on the future sale of the home.” So both borrower and lender have a stake in what’s owed getting paid, reasonably.
What about the calls by liberal U.S. Sen. Elizabeth Warren (D., Mass.) for student-loan “forgiveness?” "I’m not for government–assisted easy money. I think student loans to attend diploma mills is a bad government-assisted loan program. It only gets people in trouble.
“I am for conservatively structured government-assisted loan programs" to help other policy goals. For example: "Guarantees for solar loans and leases to [small and midsize companies] would do an enormous good at this moment. The lack of long-term financing for solar installations is holding the progress of solar back.”
What about liberal Democrats’ recent call for a 15 percent interest-rate cap on consumer loans? “I’m not big on interest-rate limits, They tend only to drive higher rate lending underground, not eliminate it.”
So should we return to commercial bankers’ old-fashioned regime of tight credit, large down payments, carefully underwritten loans, and high interest rates, even if it costs borrowers more -- or excludes more people and owners with weak credit?
“I am for somewhat higher capital requirements and conservative credit standards. I would hasten to mention, though, that most conservatives I know don’t spend any time advocating for these things — they are more than happy with [highly leveraged transactions, private equity-style risky big-debt loans], especially in a mergers-and-acquisitions context.”
If lenders and borrowers should have to live with their decisions, shouldn’t banks be left to fail, instead of getting government bailouts?
“I’m not for letting systemically important banks [and other lenders] fail if that means they would discontinue operations. Instead, I think the government should rescue these institutions to avoid the harm to the economy,” as federal bankruptcy courts do for troubled companies and consumers.
“But that does not mean that the executives and board should get to keep their jobs," as happened at several big banks in the Bush-Obama big-bank rescues.
By contrast, “as a routine matter through most of my banking career, the regulators would march into a failing bank on Friday afternoon, terminate the CEO and the board, then reopen for business on Monday morning with a replacement CEO. In short order, the regulator would sell or take public that institution to minimize the period of government ownership.”
Vague says lenders, investors, and borrowers find ways around government rules -- so the ones that work best are simple and clear. He notes his book stresses one simple regulatory policy: Government bank examiners need to relentlessly “monitor aggregate loan-volume trends, and use that as an early warning indicator of credit concerns.”
"When loans grow too fast, especially in ratio to [national economic growth, as measured by GDP,] it usually means credit standards have been significantly loosened.
“These changes are usually egregious and easy to spot. For example, when the mortgage banking industry stopped checking on income or employment and no longer required down payments, it was a good time to cut back on lending and short bank stocks."