What Caused The Global Financial Crisis according to Richard Vague

The Global Financial Crisis according to Richard Vague

Richard Vague is a managing partner of Gabriel Investments and author of The Next Economic Disaster: Why It's Coming and How to Avoid It. Vague co-founded Energy Plus (sold to NRG Energy in 2011), First USA (the largest Visa issuer in the industry and which was sold to Bank One in 1997), and Juniper Financial (sold to Barclays PLC in 2004). Vague serves on the Board of many philanthropic organizations and is also Chairman of The Governor's Woods Foundation. He blogs at Delanceyplace.com and Debt-economics.org.

2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?

“Everyone” was at fault: Wall Street, the government, and our wider society
The government certainly was not the culprit. Lenders and borrowers both were—but theirs was not a moral failing. Runaway lending has recurred so often in the US and other countries (Japan 1991, Asia 1997, US in 1929,1873 and 1893, etc, etc.) as to seem a byproduct of the system.

3. The Global Financial Crisis effectively ended in the year
2010.

4. What were the primary causes of the Global Financial Crisis?
Our research shows that a rapid increase in private debt (business plus consumer debt, including mortgages), coupled with high overall levels of private debt, is *the* reason for financial crises in major economies. Specifically, if the private debt to GDP ratio in an economy grows by roughly 17% or more in a five year period (which I call "runaway lending"), and the overall level of private debt to GDP is 150%, then you are almost certain to have a financial crisis. And if not a crisis, a dramatic deceleration in GDP growth. None of the other factors that are often cited as causes of financial crises come much into play in a causal or predictive way—not government debt, not current account trends, nor currency issues, etc.

5. What still should change as a result of the crisis?
What still needs to happen is widespread restructuring of private debt to bring overall levels down, and higher overall effective capital requirements for lenders to prevent a recurrence.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

Please send suggestions and comments to Investor Home