When a Credit Boom Leads to Doom.

• Author: McKinley, Vern

A Brief History of Doom: Two Hundred Years of Financial Crises By Richard Vague 240 pp.; University of Pennsylvania Press, 2019

Of the many explanations for financial crises over history, one that does not seem very controversial is that there must first be a run-up in private debt, which ultimately triggers the crisis. In A Brief History of Doom, Richard Vague emphasizes the need to focus on the growth of private debt in detecting that a crisis is near or has already begun.

In researching the book, Vague applied his skills as a partner at Gabriel Investments. He organized a team of analysts to unearth credit data for dozens of financial crises around the world over the past 200 years. He is also the author of the 2014 book The Next Economic Disaster: Why It's Coming and How to Avoid It, which relies on many of the same theories about the causes of financial crises as his current book. In the earlier book, he advanced the idea that China might soon face financial disaster and that U.S. debt levels showed that banks are still vulnerable and need to accelerate the pace of debt restructuring above what they had already done in the post-crisis period.

A simple thesis/ In his introduction, Vague states his theory of financial crises: "Widespread overlending leads to widespread overcapacity that leads to widespread bad loans and bank (and other lender) failures." To research those relationships, he explains that he has studied dozens of crises from 1819 to the present, with most of the focus on the United States, but he also "detours" to crises in the United Kingdom, Germany, France, Japan, and China. In almost every case he has researched, the financial crisis was "preceded by extraordinary growth in private debt, especially in ratio to" gross domestic product.

One useful standardized presentation format that he relies on to demonstrate this sequence of events is what he calls a "crisis matrix." For each instance of a financial crisis studied throughout the book, a matrix displays total federal debt and total private debt, with the latter further broken down into business, household, mortgage and commercial real estate debt. The numbers are shown in both nominal terms and as a percentage of GDP for the period in the run-up to a crisis (for example, from 1923 to 1928 in the case of the Great Depression).

These matrices are limited by the vagaries of the historical data that are available. The data for the U.S. cases of instability are similar...