Photo credit: Courtesy of the author
“I like succinct books,” said The Atlantic’s Editor-at-Large Steve Clemons at the New America Foundation’s book party in honor of Richard Vague’s latest tomb: The Next Economic Disaster. “I like books that get right to the point, tell you what you need to know and then set up the debate, put out data and then you can either applaud or rip it apart pretty quickly and they don’t obfuscate behind 900 pages. To put this in context, Richard used to be the ‘King’ of the credit card business.” Clemons moderated the panel discussion on Why its Coming and How To Avoid It.
Richard Vague
Needless to say, chatting with the ‘King’ of the credit card business was daunting considering that Economics #101 was never on this reporter’s educational playlist. Nevertheless, Hollywood on the Potomac chatted with Vague prior to the event. Anticipating the 500 pound gorilla buried under 900 pages, we requested up front the necessity to lay it all out in the most simplistic terms, as in please don’t obfuscate – yes, we looked it up.
Citing the recent global monetary crises of 2008, he explained how a very rapid buildup of private and consumer debt arrives five years before the actual crisis: “In this case it was mainly home mortgages, but in Japan’s crisis in ’91 it was commercial real estate. It could be anything. It is a really rapid rise in debt in a very short period of time. That’s what we see in China now. Our threshold for this is if it grows 20 percent to GDP in five years, that should be a warning sign. In China it’s grown almost 50 percent in five years.” Missing the significance of how China’s warning signs applies to us, we asked him to explain.
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“When there’s a really rapid run up in private debt,” he noted, “that means we’re building too much of something. It can be houses, it can be office buildings, it can be railroads like it was in the late 1800’s. We’re building too much of something and what that means is number one, there’s probably more bad debt than there’s capital at the banks. So the banks are risking collapse or failure and the government has to step in to save them. When we built way too much of something, economic growth is going to be very slow because we already have more capacity than we need and it’s going to take several years for us to absorb that capacity before economic growth can continue.
In China we’ve got that situation. They’ve got ghost cities you’ve probably read about. They’ve got way too much in terms of ships built and steel sitting there by the tons. If we have a crisis like this in China, it’s going to mean a slow down in Asia, it’s going to directly impact their neighboring countries like Vietnam, South Korea, Australia. But we’re going to feel an indirect effect as well because global demand is going to slow down if Asia has a crisis.
If there’s a big slow down in China, and we think that’s almost inevitable, that means there’s going to be less demand for commodities globally and locally. That’s steel, that’s coal, but that’s also other agricultural products. So I think one of the consequences is going to be a general commodity price decline. Farmers in Ohio can understand that.”
Translation: They will not require as many of our services or products and therefore it slows us down to the extent that any of our banks or funds have invested in China.
We asked him if he thought that the government did the right thing by bailing out Wall Street? He did, but with some protective nuances. “Yeah, I make a distinction though,” he said. “I think you can preserve the institution without necessarily preserving the CEO and the Board. I mean I’ve been in banking for most of my career and it used to be routine that you closed the bank or other lending institutions on a Friday and you re-opened it on Monday under different ownership – a government assisted ownership.
The CEO and the Board was removed and new ones were brought in. I think it’s important to keep institutions alive because that keeps commerce flowing and it preserves the jobs of the people in those institutions, but I don’t think it’s necessary to preserve the jobs of the CEO and the Board. I think the issue is that Washington policy makers confuse two things. One of them is keeping the institution alive, which I think was the correct thing to do, and the other is with keeping the people who had been managing them and making the bad decisions in play. People believe those two things had to go together. I don’t.
The sentiment then was that these institutions are so vast and so complex that we can’t manage them on an on-going basis without the existing management perks. I think that, again and again, was what people stated was their belief. I don’t happen to agree with that. In a sense they’re private institutions so they have to be left to make their own decisions about how to operate. But the regulators can come in and if the government is going to bail them out, then the government has the power to remove these folks.”
Richard Vague definitely had our attention. He narrows it down to basics: You have no money, you have no income coming in, the economy’s crashed, you were part of the crash, so you put your life on charge cards. Consumers and businesses, small businesses especially, are carrying around an unprecedented load of debt. “What that means is that they have less money to spend on vacations and restaurants and cars, the other kinds of things that would power the economy forward. We think there’s a direct link between those two things. The fact that consumers are loaded to the gills with debt is one of the reasons the economy is slow.”
Steve Clemons – Photo credit: Tyler Bugg
So, is the fall of the Roman Empire about to hit The United States???
“You know, I don’t see that in The United States,” he replied. “What instead I see is a generation of what I would call side ways growth. We aren’t seeing robust growth like the kind we saw in the 50’s and the 60’s that really powered this country forward. We see kind of what’s happened in Japan over the last 20 years, kind of an anemic growth of substandard employment that lasts for 20 plus years.”
Here’s the in-depth discussion on the current state of the global economy for those who took Economics #101: The Next Economic Disaster: Why It’s Coming and How to Avoid It!
