Published by EH.Net (November 2019)

Richard Vague, A Brief History of Doom: Two Hundred Years of Financial Crises. Philadelphia: University of Pennsylvania Press, 2019. xiii + 227 pp. $30 (hardcover), ISBN: 978-0-8122-5177-7.

Reviewed for EH.Net by Patrick Newman, Department of Economics, Florida Southern College.

Most macroeconomists and economic historians are familiar with the classic pattern of a business cycle and the related financial crisis. First, there is the boom, which is a period of unusually high economic growth and prosperity when new bank loans fuel businesses to aggressively take risks and embark on various investment projects. However, the good times do not last forever. The boom is eventually followed by a financial crisis when a couple of prominent firms that participated in the prior economic expansion fail, which sparks runs on banks and other financial institutions that lent to the failed firms. The economic growth soon sputters and the economy enters into a bust. Prior feelings of optimism are replaced with pessimism and uncertainty. However, within the span of a couple of years the economy recovers and enters into a new boom, and the cycle repeats itself.

The recent 2007-2009 financial crisis and impending fears about the probability of a similar event occurring in the future have led to a burst of new research papers and books on understanding business cycles and financial crises. Richard Vague, a managing partner of Gabriel Investments, has written one such work. Vague’s A Brief History of Doom: Two Hundred Years of Financial Crises surveys booms and busts across multiple countries since the end of the Napoleonic Wars. Whereas most studies of financial crises concentrate on the actual crisis and subsequent downturn, Vague devotes most of his analysis to the booms that precede the busts. Vague follows in the footsteps of Hyman Minsky (1919-96) and argues that financial crises are the result of excessive risk taking, speculation, and bank lending. Most importantly, they are always preceded by large increases in private debt. Banks and other lenders make too many loans, many of which are not based on economic fundamentals and are necessarily unprofitable, and when they go bad the economy tailspins into a financial crisis and a severe recession or even depression.

The book has six chapters that survey various prominent booms and financial crises. Vague does not proceed chronologically but instead jumps around across different time periods. Chapter 1 analyzes the real estate bubble in the 1920s and the ensuing Great Contraction (1929-1933). Chapters 2 and 3 then skip ahead to the U.S. Savings and Loan (S&L) crisis in the 1980s and the Japanese crash of the early 1990s. Chapters 4 and 5 go backwards to the nineteenth century and investigate important transportation booms and banking panics in various countries. Vague finishes his historical study in Chapter 6 with the 2000s housing bubble and 2008 financial crisis. For each episode, Vague provides a “Crisis Matrix” that provides pertinent data, such as the ratio of federal debt to Gross Domestic Product (GDP), total private debt to GDP, and various subcomponents of private debt to GDP. The data vary based on what Vague and his team of researchers compiled from available sources, which gets increasingly difficult for older business cycles (the complete data can be found on Overall, Vague’s data are consistent with his hypothesis that in the booms preceding each financial crisis there was an increase in private debt to GDP and unwise loans made to businesses and consumers.

Vague could have enhanced his analysis by looking at what caused the increase in private debt and lending that he considers the primary cause of a financial crisis. No crisis matrix contains data for possible explanations, such as money supply aggregates, bank reserves, and movements in interest rates. Vague also devotes little space to central bank monetary policy (or monetary policy by other government agencies) or any other activist government policy that encouraged problematic lending practices. When he does, it is usually very brief and not integrated into his historical narrative. For example, in his analysis of the 1920s real estate crisis in Chapter 1, Vague briefly mentions that the Federal Reserve allowed unprofitable banks to continuously borrow from the discount window but he does not investigate this policy or any other expansionary actions of the Federal Reserve in the 1920s further (pp. 27-28). Problems from expansionary monetary policy are generally minimized, such as in Chapter 2, when Vague attributes the inflation of the 1970s that later caused problems for the S&L industry to high oil prices, without mentioning at all the accelerating increase in money supply aggregates in the 1960s and 1970s (pp.50, 55). While Vague largely sidesteps the role of the central bank by arguing that financial crises have occurred in the absence of a central bank, this does not rule out the possibility of other forms of expansionary monetary policy or that central bank policy was a contributing factor to booms when they were in existence (p. 191). When regulatory policy is considered, the blame is generally on deregulation and not regulation (pp. 64, 171). Perhaps this is because Vague believes “there is a constituency with the wealth, means, and incentive to promote an unfettered laissez-faire outlook, and there is no well-funded constituency to promote an alternative viewpoint” (p. ix).

Another way Vague could have improved his study would be to include an index at the back of the book. An index enormously helps a researcher navigate to particular pages where a topic is (or is not) discussed and better understand the author’s argument. The lack of an index will unnecessarily limit the book’s readership.

Overall, Vague’s work provides important empirical data that show that there have been large increases in private debt and bad loans in the boom periods that precede financial crises, and these increases are important causes of financial crises. However, he leaves the reader still asking what precisely caused the bad loans to begin with.

Patrick Newman is an assistant professor of economics at Florida Southern College. His most recently published article is “Personnel is Policy: Regulatory Capture at the Federal Trade Commission, 1914-1929” in the Journal of Institutional Economics (2019).

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