A month before coronavirus shutdowns hit Pennsylvania harder than any other state, Richard W. Vague was named the Commonwealth’s acting secretary of banking.
If Vague wasn’t expecting the shocking stall in the U.S. economy, he has prepared for it. Twenty years ago he built the nation’s largest credit card bank, now part of JPMorgan, Chase & Co. He’s a Philly venture capitalist who runs Gabriel Investments, and a philanthropist who endowed a Penn professorship, now held by gene therapy pioneer Carl June.
Vague is also a political donor to some liberal Philly Democrats and U.S. Sen. Pat Toomey (R., Pa.) as well as an author whose books include A Brief History of Doom: Two Hundred Years of Financial Crises. Vague argues that financial collapse tends to follow periods of overaggressive bank lending to citizens and businesses, and he suggests what governments should do to help, or stay out of the way.
How well is Washington fighting this current collapse? “I am very impressed” by the economic response, said Vague. “It’s almost as if 2008 was a dress rehearsal for 2020. In a few weeks they did everything it took them a year to do — and more.”
Vague’s books describe “helicopter money” — mass payments straight to consumers in times of need — and “jubilee” — mass loan forgiveness, with conditions. Was he shocked to see some of both in last month’s CARES Act, after Congress wouldn’t go that far in 2008?
“I was pleasantly surprised a Republican Senate would act that quickly to put together that program, which included several good first steps,” Vague said. “The checks of $1,200 that they are mailing everyone.” And the $600 weekly unemployment supplements. Plus “the $350 billion in ‘forgivable’ Small Business Administration loans. All good."
But is it enough? No: “I thought it was a third or a quarter of what needs to be done. The SBA money has all been claimed. There are countless applications for that funding that haven’t made it to the final step. There are businesses who have no borrowing relationship with a bank, that never made it to the front door. They are going to need at least $350 billion more.”
Vague welcomed the Federal Reserve’s Main Street initiative announced this month to lend to middle-sized employers not targeted by big federal corporate loans or the small-business program.
But won’t the massive borrowing to pay for it all inflate prices? That’s not how it works, says Vague. His next book tracks public debt in 47 countries going back decades. “How many times has high government debt resulted in inflation? Hardly ever. There is no causality. To the contrary: the more government borrows, the lower Treasury rates go."
And now, “my expectation is interest rates will decline further. What we will be battling for quite some time is deflation” when the need to cut prices for stuff no one wants presses companies to cut wages too.
This happened before: After World War I, farmers who borrowed to feed soldiers went broke when the armies went home, war factories shut and lethal “Spanish flu” colonized the world. Unemployment jumped from under 2 percent in 1918 to over 16 percent by 1921 — about what it is now.
Aggressive Wall Street loans got industry rolling again and inflated the Roaring Twenties stock market, though small farmers never did recover. It all blew up in the Great Depression.
To be sure, “we don’t have that overcapacity today,” except in a few sectors like oil, where too much investment has collapsed prices; and college lending, “the area where you have the most anguish across the country.”
But private debt could cripple us soon — if the slow economy leaves loan payments at their current levels, while incomes fall, so borrowers can’t pay. “That debt burden is going to increase.”
So people need more money — bigger relief checks. “In Europe some governments are directly taking responsibility for company payrolls. We need to get money in the hands of folks.”
The $1,200 checks should go out, not once, but monthly “for as long as it takes.”
Don’t the Fed bailouts and steps like hiring investment firm BlackRock, to manage government bond deals entrench the failure-prone Wall Street financial system?
“There’s a whole lot of folks immediately criticizing things like the Blackstone arrangement, and that is justified," Vague said.
But, he adds, “nothing that is done this quickly could completely address all the fairness and process issues that arise. It’s similar to a war — World War II, World War I, the Civil War."
What about all the people whose mortgages could force them into the street? Vague would like to see lenders do for homeowners what they do for commercial debtors — trade unpayable debt for equity in the home, so the lender gets back a slice when the place is sold years later. And a bankruptcy law that is friendlier to borrowers.
“None of that brings relief as fast as we need it,” Vague concluded. “But we need smarter ways” to manage the debt that threatens to choke aging communities, and start growing again.