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 across crises, with some extra details customized to the concentrated risks featured in each crisis. The Great Depression matrix adds a line item for broker loans and the Great Recession matrix adds a line item for subprime loans.

After the initial chapter devoted to explaining his theory, the subsequent chapters fall into a pattern. They each focus on a single case study of a financial crisis that Vague categorizes as follows: the Jazz Age lead-up to the Great Depression, the 1980s decade of greed, the crisis in Japan during the 1990s, the industrial age of the early 19th century, the railroad crises of the late 19th century, and the 2000s global mortgage and derivatives crisis. These chapters include numerous tables and graphs tracking elements focused on the up-and-down cycle of private debt: first the initial start of a growth cycle, followed by high debt levels, and then the pull-back as the crisis runs its course. These data are supplemented by the crisis matrices. There is no source for the data cited in most cases, so I assume that much of the analysis is original research by Vague and his team.

Dissecting the booms / I have read dozens of historical books that have been published over the past decade on financial crises. Vague’s case study chapters distinguish themselves from those books to the extent that the data he presents in the tables, graphs, and matrices, combined with the narrative, provide a unique perspective that is not available in other historical reviews.

Of all the chapters in A Brief History of Doom, the one I found both unique and most persuasive was his case that private debt drove the railroad crises era of 1847–1907. He writes, “Railroads incurred massive debt to establish and maintain their operations, but the debt required for the land sales and housing and commercial construction in the towns and farms along railroad routes was every bit as large and often larger.” A series of graphs in the chapter reveals the “connection between railroad overexpansion and financial crisis that often occurred” in this era. In particular, the chapter’s first graph visually shows the correlation between public land sales and miles of railroad built, superimposed on the timing of the crises from 1819 to 1907. A regular pattern is discernible: once the level of land sales and the miles of railroad built spikes, there is always a coincident or lagging crisis around the point of the spike. Vague proceeds to break down the private debt run-up in individual crises during the era: 1847, 1857, 1866, 1873, 1882, 1893, and 1907.

I have studied this era in detail and I am not aware of any other researcher who has made this connection between the railroads and the many financial crises throughout much of the century. Such references are usually limited to the bankruptcy of Union Pacific Railroad in 1893 and the challenges its restructuring presented during that year’s financial panic.

The other chapters provide useful information and support Vague’s overall thesis on the build-up of private debt in the run-up to crises, but the data do not present as stark an image and the chapters are not as unique in comparison to other historical research. Presenting data to explain the lead-up to the Great Depression is well-trodden ground. He presents a none-too-surprising graphic with U.S. private debt beginning to move upward around 1922 and peaking in 1929. Another analysis of broker loan data shows a similar trajectory. Moving to the Great Recession, he describes the crisis as “inevitable before it was obvious, although few had noticed.” He offers many elements of the oft-repeated crisis narrative set out in other histories that understates the role that government policy played in the building up of debt in the run-up to the crisis.

In the real world / In his concluding chapter, Vague reveals his solution to preventing future crises. Unfortunately, it does not involve government stepping back from ill-advised interventionist policies and letting markets clear. Instead, he writes:

With what we know of financial crises, they can be foreseen and prevented … while the boom is growing. Some have asked me, Why bother — shouldn’t we let the free market run its course, and aren’t those who misbehave getting their just deserts [sic]?

His answer focuses on a paternalistic approach to public policy to protect those who get caught up in the fallout from a crisis: “No. It is never just those who misbehave that suffer the consequences. Thousands upon thousands of innocent people get hurt along the way.”

Vague’s preferred policy response begins with “measuring growth in the ratio of private debt-to-GDP as an early warning sign. The surest strategy for early detection of a financial crisis is this: monitoring the aggregates.” He wants some mechanism to assure that “a central authority is keeping careful, ongoing records of all lending activity, including aggregate and sector-level information on instruments that are derivatives of loans.” On the federal level, this sort of analysis is part of what is called macroprudential policy, a form of intervention that aims to limit the supposed procyclical tendencies of markets. Vague does not say which central authority would be involved. Based on the current structure of the bureaucracies in Washington, one likely candidate would be the Financial Stability Oversight Council, a body with representatives from all the major financial sector authorities.

The tables, graphs, and matrices, combined with the narrative, provide a unique perspective that is not available in other historical reviews.

Vague also does not explain how this intervention might work in practice, thereby ignoring many practical challenges with implementing this framework. These would include determining the precise timing and form of any intervention intended to counteract a boom in lending activity. With lags in the availability of data and the additional time it would take a central body to first deliberate, then determine that there is a bubble, and then agree on an intervention, the window for having the right effect might have already passed. This form of intervention is centrally planned lending policy, pure and simple. It seems that Vague has succumbed to what Hayek called the fatal conceit: the idea that if we just get enough smart people together in a room working for a central authority, then we can solve all manner of the world’s problems, including the elimination of financial crises.