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Yves here. I know some readers will take umbrage at the notion that Richard Vague did well in the credit card industry before having a Damascene conversion after investigating financial crises, which led him to recognize the danger of private debt.

It’s all too easy to forget that bank deregulation and what regulators saw as the more efficient use of costly bank equity via securitization were promoted aggressively, ironically not so much by many banks (who resisted adopting new technologies) but by enablers/big bank advisors like McKinsey and regulators themselves. I wasn’t on the retail banking side of McKinsey’s banking practice, but even so, I came across one of the comparatively few McKinsey slides that wound up being used at multiple clients. It showed the insurmountable cost advantage of using securitization. The message to banks was clear: “You will be on this bus or you’ll be under the bus.”

When I met Vague, he made clear he understood back in the day that he was engaged in regulatory arbitrage. He would repeatedly ask bank regulators: “You understand what I am doing, right?” They not only said they did, they made clear they wanted to see more of the same.

By John Siman, a classicist

Here is a remarkable metamorphosis for you: Richard Vague, who, in the years before the financial crisis of 2008, was the co-founder and CEO of two credit card companies (one of which grew into the largest Visa issuer in the industry), has, over the last several years, become a learned and visionary theoretician of economics.

In 2014 he published The Next Economic Disaster, in which he introduced a radically new approach for predicting and preventing (or at least mitigating) financial crises, and in 2019 he followed it with A Brief History of Doom, in which, armed with a breathtakingly expansive array of economic data, he analyzed the financial crises which have occurred in the world’s major economies over the past 200 years —and showed thereby how virtually all of them had resulted from overcapacity caused by runaway privatelending.

A week ago Vague, continuing to inform us of his insights, published a 30-page article with the exhortative title, “It’s Time for a Debt ‘Jubilee,’” and he generously agreed to sit down for a 45-minute conversation with me — I’ve posted it on YouTube: Interview with Richard Vague for Naked Capitalism

For readers who are unfamiliar with the genuine radicalism of Vague’s thought, here are, to get you started, four of his fundamental findings. They are, I think, earthshaking — in any event I certainly thought so when he first explained them to me:

First, economic crises, like the Great Depressionand the Great Recession, are caused by runaway lending in the private sector: widespread overlending for private projectsbegets widespread overcapacity which in turn begets widespread bad loans and widespread bank failures.

Second, inflation is notcaused by excessive government spending. As Vague writes in “It’s Time for a Debt ‘Jubilee’”:

During the entire 40-year explosion of government debt from 1981 to 2020, price inflation has plummeted, not increased; interest rates have collapsed, not risen; buyers for government debt have been plentiful, not scarce, as evidenced by those declining rates; and private sector spending has proceeded apace.

Third, even apart from economic crises, excess privatedebt should be our primary economic concern. Vague writes:

Government debt has increased markedly and gets the most attention, but we should be more concerned about the rapid growth in private-sector debt…. The problem of private debt could not be more consequential. It’s been an underlying issue in several of the decade’s worst problems, from the 2008 global crisis and slow growth that followed the Great Recession to the discontent that led to Donald Trump’s election in 2016.

Fourth, it is the necessary and proper role of the governmentto reduce onerous levels of private debt and to mitigateprivate financial crises. Vague applauds the Fed’s performance in 2008 and again this year, but he looks back with dismay on the President Obama’s failure to help the millions of Americans who got foreclosed on back then, just as he is now dismayed by the failure of the current President and Congress to get sufficient helicopter money to the millions of Americans who need help during this emergency. Thus Vague writes in a new article in The Hill:

The Federal Reserve, by its dramatic support of the credit markets, has given crucial support to the assets primarily owned by the wealthiest Americans. It has kept the well-off very well off. The reluctance of Congress to enact additional aid would seem to convey an unwillingness to provide the support most needed by average working Americans.

We need to listen closely to Richard Vague, and then pray that some of our politicians do so too.