Well written, easy to read, no financial background required, on why financial crises happen.
The author puts together a very well-developed argument as what causes financial crises by looking at many historical events worldwide and piecing together the data to support this insight.
Note: This post was written some months ago and scheduled to post during the 2020 COVID-19 outbreak. I rescheduled it for obvious reasons due to the book’s title. Please do not take this as a prediction of any kind for market swoons.
“When it comes to financial crises, we’re not in the grip of unseen and hopelessly complex forces. Such crises are neither inevitable nor unpredictable. Runaway private debt and the resulting overcapacity does a better job than any other variable in explaining and predicting financial crises.” pp ix
He also explains that stock market crashes are not the cause of financial crises, but a symptom of them. Active government intervention softens the short-term economic impact but there still much private debt outstanding. Less intervention means more short-term economic distress, but also more deleveraging to get on a firmer footing later.
Private debt (as opposed to government debt) “is indispensable but becomes a problem when it grows too fast or gets too large in relation to the economy.” pp16
Basically, lending allows for expansion of the economy in many sectors, but runaway lending turns bad when the bubble trying to support the source of income for loan repayments pops.
Those of us who lived through the 1970’s, 80’s, 90’s, 2000’s, and 2010’s events may recall these examples he goes through. But, seeing history lined up as Richard Vague explains brings new insight into what leads up to warning signs. In each case it’s too much private debt; not government debt.
He also goes back to before the industrial age to 1813 and works through numerous financial crises over the past two centuries that also arose as a result of too much private debt relative to the economy that is trying to support it. Understand that the economy represents the income used to repay all loans, so it basically is a national economy’s debt to income issue that he presents; much like individual debt to income ratios signal too much debt for the income to support. And just like in individual’s cases when there’s a shock to what produces the income, debt goes unpaid and banks falter.
He not only covers US crises, but those of other countries as well to demonstrate that the high debt problem is an international phenomenon with a similar cycle of events leading to crisis. Simply substitute one reason debt is being issued for another, anytime or anyplace, and the cycle emerges. He writes well to captivate the reader in how the Irish potato famine links wot wheat excess and price collapses. Along the way how financial abuses, fraud and outright speculation leads to mountains of debt with “almost no financial ground beneath it.” He even discusses slavery and how this created debt issues, even among the slaves themselves. And how the UK indirectly supported slavery in the US even after they themselves abolished it in the UK.
A well written piece on financial history that brings in the human element of greed to explain many historical events around the world in a different light over the past two centuries, and how they are interconnected with the past one leading to the present one leading to a future crisis. Building overcapacity or over supply leads to debt fueled speculation combined with underestimated costs leads to crisis and failures time and time again in every corner of the globe, and how there’s a linkage between activities in one country lead to issues in another time and time again.
The concluding chapter succinctly discusses what should be done to notice and take action to mitigate, if not prevent, the next crisis; which is often not solved by actions taken based on the last crisis. There are plenty of references in the notes section to support his observations and conclusions.
Well written and worth your time to go through this easy to read work so you too can become more aware of the warning signs. Why? “It is never just those who misbehave that suffer the consequences. Thousands upon thousands of innocent people get hurt along the way. … It is also true that life is about much more than financial matters. Nevertheless, the effects of a financial crisis are devastating. Lives are ruined.” pp 196
Being just a little forewarned as a more informed consumer may help prevent YOU from being one of the many that succumb to too easy credit, or speculation around it, that unwittingly builds one person by one person into a mass of over leveraged people that suffer when the supporting concept that leads to over-extension price’s pop and begin the decline leaving everyone over exposed.
And it may be the next generation that didn’t experience the issues this generation had – and forgets.
This review first appeared on Amazon 30 Jun 2019.