Private debt, not U.S. deficit, stalls growth

It's not government debt -- it's private citizens' and businesses' towering unpaid loans -- that grow relentlessly, choke spending and growth, and threaten the economic future of the U.S. and the world, writes Richard Vague, in a new book, The Next Economic Disaster, out next month from the University of Pennsylvania press.

Vague, in a 25-year career as boss at First USA Bank, the Bank One-JPMorgan Chase and Barclays credit card shops, and as founder of Energy Plus of UCity (sold to NRG for $180M), built a reputation as the father of corporate-affinity mass-marketing (he brought you the Southwest Air MasterCard, for example). Since moving to Center City nearly a decade ago, Vague has been backing Philly-area startups (through Gabriel Investments) and good causes (Haitian development, research on why U.S. wars in Asia don't create lasting peace). And now, economics:

The Next Economic Disaster argues that the threat to economies isn't too much borrowing by out-of-control governments. It's the piling-on of private debt by out-of-control banks and borrowers that will most surely lead to economic stagnation.

Like French economist Thomas Piketty's fat case for a wealth tax, Capital in the Twenty-First Century, Vague's slender book piles up data-tracking economic numbers across national economies over time.

But Vague is comparing economic growth, not to investment or income distribution, but to debt levels, which economists tend to treat as a symptom, not a cause, of changes in production and consumption.

Vague observes that crushing private debt rises in advance of economic stagnation (unlike government debt, which is stimulative). And that debt tends to rise over time because it is typically refinanced by borrowers who hope to spend more and improve their condition.

And that the current U.S. and European malaise, like Japan since the 1990s, is caused not by a cycle of investment, overproduction, and liquidation, but by a long-term accumulation of private debt. That debt is now at levels we haven't seen since before the Depression and World War II all but wiped out private indebtedness.

There are a few hard roads out of overpowering debt:
- War and depression, which wipe out people, property, and their obligations.
- Inflation, which wrecks savings and investment and is tough to control.
- Voluntary belt-tightening and paydown, which is rare across societies, since it tends to mean lower living standards.
- Orderly debt-forgiveness programs, like the biblical concept of Jubilee years.

Vague notes that bankruptcy courts allow businesses to cut their debt loads, or convert it to creditor ownership. Why, then, is it so much harder for consumers? Vague is among the observers who blame the 2005 U.S. "bankrutpcy reform" act (backed by MBNA Corp. bosses Charles M. Cawley and Bruce Hammonds, bank lawyers such as Ballard Spahr's Alan Kaplinsky, then-U.S. Sen. Joe Biden, D-Del, and Congressional Republicans) for making it much harder for homeowners to repudiate their out-of-control credit card debt, leading to many more foreclosures.

Bank critics later urged President Obama's administration to make it easier for consumers to write down debt or transfer the underwater portion to lenders as equity. But it's tough to organize bailouts for anyone who isn't a big, well-organized industry.

Most important to Vague is enforcing simple rules under which bank regulators, who have repeatedly allowed credit bubbles by forgetting the excesses of the previous blow-up, would require lenders and loan financiers to set aside a lot of reserve capital in times of rapid loan growth - not just as a hedge against disaster, but to force them to slow down. (Adapted from my column in today's Philadelphia Inquirer)

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