Richard Vague: China's Greater Preparedness in the Face of Economic Crises

Transcript

Rob Johnson:

I’m here today with Richard Vague, the Secretary of Banking and Securities for the state of Pennsylvania, a member of the INET Governing Board, an author of many books, including the Brief History of Doom: Two Hundred Years of Financial Crises, and of a forthcoming book in April, 2021, The Illustrated History of American Business. It’ll be 250 years of American business. Richard, thanks for joining me today.

Richard Vague:

It’s a great privilege to be here, Rob. Thank you.

Rob Johnson:

Let’s start with we have a pandemic. A lot of things are being unmasked. A lot of things are being questioned. What are you seeing in any realm that concerns you? What are you seeing that inspires you? And what would you like to urge people to do in order to get back on track?

Richard Vague:

Yes, it’s an overwhelming issue. It’s almost without precedent in American history, the Spanish influenza and not withstanding. And the response thus far has been surprisingly good. I think the Fed has stepped up in an extraordinary way. I think our current Fed chairman, Jerome Powell, history will show that he was perhaps one of the boldest of the Fed chairs that we’ve had during the Fed’s history. I think they’ve been criticized of course, but as a general matter, their support of financial markets has been bold and important, and has made a huge difference.

Richard Vague:

The second thing that needs to be done in a crisis like this, of course, is not just the monetary things that Powell is doing, but the fiscal things that Congress needs to do. And I was pleasantly surprised at how much Congress did in a short period, early in the pandemic crisis. I think the support for individuals was important. I think many of the programs were important. My key criticism is that it wasn’t enough. And we see that playing out in Congress right now, where we have a kind of 1 trillion is bid and 3 trillion is asked for the second wave of CARES type support. And what’s really needed is two things, primarily. One of those is more support for individuals. We need to extend the payments. It can take a variety of forms. It can be direct payments. It can be continued unemployment support. It could be other things, but it’s critical because millions of folks are still unemployed, millions of jobs are permanently gone and these folks are going to need support for quite some time.

Richard Vague:

The other big area of great need right now is support for states and local government, cities and the like. And the need there is at least a half a trillion, if not a trillion. The need is acute. States are facing very difficult decisions if they don’t get that type of support and those decisions will need to be made starting in this fall. So we are not out of the woods. We need to be prepared for this to last for some time. We need for the Fed to continue doing the great things it’s doing, but we need for Congress to do more. I think if that comes together, I think we’re going to be fine. If that second part doesn’t come together, we’ve got a lot of pain over the next year or two.

Rob Johnson:

Yeah. Well, you wrote a book about 200 years of financial crises. And people are obviously drawn to comparing what’s happening now and obviously the big, large Fed response that you referred to, to 2008 and 09. But from my way of seeing, 2008 and 09 was a financial system dysfunction that unraveled. Whereas the pandemic, you might say the origins of the challenge come from something other than reckless or unmindful behavior in the financial sector. How do you see this crisis in relation to the past crises that you’ve studied?

Richard Vague:

Rob, I think you’re exactly right. All the major crises that we studied, and we studied 43 major crises across the six largest countries in the world over 200 years, all of those related to runaway private sector lending. And once you have runaway private sector lending, you create overcapacity, and that’s kind of the essence of a financial crisis. It’s debt that leads to overcapacity. In 08, that meant we had far too many houses and other real estate. It was going to take many years for us to absorb that overcapacity. That’s why GDP had to decline. We had to work the bad debt out of the banking system. That’s why the rescue was necessary. And that’s very typical of that type of crisis, which has been the dominant type of crisis over the last couple 100 years.

Richard Vague:

In the 19th century, 1884, 1873, 1893, it was railroad overcapacity. In the 20th century, 1929 and the like, it’s been much more overcapacity in real estate, but that’s what that type of crisis is. This crisis has been a, we didn’t have overcapacity generally across sectors in the United States, and anywhere else in the western world. There’s some overcapacity in Asia, that’s a separate discussion. But it was a collapse in demand. That’s a very different thing. And when you have a collapse in demand, the way to fix it is to restore that demand through government spending and government support of financial markets, so it’s a different thing.

Rob Johnson:

The different experience you said in parts of Asia, you and I were together in China, both looking at where China’s financial dynamics are now, and also exploring that their modus operandi for a resolution is somewhat different than in the west. We have a market crisis and then people come in and clean it up. In China, there seems to be, I’ll call it a custom or a trust or something, that people can act preemptively. They don’t have to wait for the crisis to make it legitimate for them to act. And I’m just curious how you compare the two systems.

Richard Vague:

Yeah, China is very different. And you’ve captured it precisely. What I would look to is the 1999 crisis in China, where bad debt, they were creating the same kind of overcapacity that the other participants in what’s called the Asian financial crisis were participating in. There was a lending way too much. They were creating way too much, primarily in real estate, but also in manufacturing. And bad debt had reached some, say 30% to 40% of loans in the big four Chinese banks.

Richard Vague:

Now, in the United States, if bad debt to loans exceeds 2% or 3%, you probably got a failed bank. In China, it had reached 10 time those levels. Nevertheless, China came in and relatively deathly solved the problem kind of preemptively by going in, allowing those four banks to convey those bad assets at par to asset management companies, whose job it was to work through injecting some equity into those banks, using the reserve, the excess reserves the bank had at the PBLC, by the way. Pretty much solved the problem in two or three deaf steps. So there never was widespread bank failures or the need to clean up after the fact and the way there was in the United States. It’s a very different system.

Richard Vague:

I think China learned any number of lessons during that period, and is using those lessons on an ongoing basis now. We have what, 60 million empty homes in China. So you have overcapacity today, but China, aside from letting some peripheral institutions fail by and large is just as you portrayed it, kind of proactively or preemptively taking care of things. And in my mind, we’ll make sure that the financial system by and large stays intact in that country while it works through whatever problems it works through.

Rob Johnson:

Yeah. It’s always been interesting to hear policy officials in the United States because they talk as though once a crisis has erupted, even if the source of the maladies was recklessness in the financial sector, you have to save the financial sector so that it doesn’t take the economy down with it. That neglecting to bail out is much more dangerous. It’s, how would I call, antithetical to do a bailout relative to what we call market discipline, but you can’t take society over the cliff.

Rob Johnson:

I think the Chinese way of administering things has a very different tone. And I guess the only danger that Westerners would look at is that in a corrupt government structure, people may be pretending that there’s a need for a bailout in order to subsidize the crony sectors that are part of the internal structure of power. But I think this is very muddy water now. We’ve seen things like the group of 30, talk about the need to fortify, the credibility of bailouts, because they’re terrified that Congress will not vote like they did on a second shot for tarp. A lot of these people like a group of 30 are concern that these people don’t understand the ramifications of going over the waterfall. And so we need to fortify it. On the other side, people call that the mother of all moral hazards and upstream you need prior restraint. If you know downstream, there’s no, what you might call bankruptcy risk premium. And that it also tends to give a competitive advantage to large banks that are too big to fail. So there’s a whole lot of things going on there.

Richard Vague:

What I would’ve done differently in 08, 09, 2010, and I agree the institution should have been preserved. What I wouldn’t have done is preserve management and the board. And those are two different things. For my entire career, I was in banking for 30 years or something like that. If a bank was about to fail, the regulators would walk in on a Friday afternoon, shut it down, fire management, fire the board and reopen on Monday morning, counterparties would be preserved, employees would still have their jobs and why that wasn’t considered and why that hasn’t been discussed, and I think for an executive or a board to lose their jobs is a good dose of moral hazard prevention. That’s the different view I would’ve taken in 08 and going forward. I do think there’s value in preserving institution not to preserve the jobs of those who brought the harm.

Rob Johnson:

Some argue, well, America’s not about socialism, but the counterargument in that case was well, we’ve already socialized the downside, all we’re fighting about is who owns the upside.

Richard Vague:

Owning it and taking it public in debts over a couple of years so that the government doesn’t retain ownership is a pretty easy thing to do.

Rob Johnson:

That’s right. Joe Stugotz I remember saying at the time, the polluters got paid and that was demoralizing. I remember the inception of INET really came in the aftermath of the TARP legislation when Robert Dugger and I were working closely with George Soles who was writing Op-Eds and we were both down as alumni of the Senate and House Banking committees, working in the trenches and trying to influence the structure of the legislation and trying to work with the staff leaders who used to be colleagues of ours when we were on the staff.

Rob Johnson:

And right afterwards, Soro sat down with us for a lunch. And he said, “I grew up in Hungary and that whole region was devastated by the rise of Nazis. And in my view, the straw that broke the camels back was the Austrian and German banking crisis of 1931.” And he went on and he said, “Essentially, integrity, faith, trust in structure and leadership disintegrated,” and he wanted to found INET to fill the void that he feared would be coming because the TARP legislation was ill formed and would create mistrust in governance, in expertise, in the financial sector. And in that turmoil, there needed to be a constructive force to help put us on to a healthy trajectory.

Richard Vague:

And you guys have made us all very proud and have done so much work relative to that issue since that founding. INET is extremely important on that very issue. I tell you the one thing that, the one inequity that still haunts me relative to that critical period, 08 to 2010 is the banks were rescued. But the biggest victim of that time, which were homeowners with underwater mortgages, people barely lifted a finger to help them. And it was there’s 52 million-ish mortgages in the US at that time, estimates were as many as 15 million of those were underwater by 10% or more. There were a couple of relatively easy ways to create relief for those borrowers. None of which were examined. In fact, the mere mention of it gave rise to the tea party is, I think you’ll recall, but we didn’t take care of households. We took care of institutions and that’s a big difference.

Rob Johnson:

No, that’s right. Looking at counterfactuals, Atif Mian and Amir Sufi, wrote a book House of Debt, which I know you’re familiar with. And they argued because of who the homeowners were, people with a much larger marginal propensity to consume than the stockholders of major banks. That had we written down those mortgages and recapitalized the banks from the public treasure, we wouldn’t have had to do as much fiscal stimulus because the people who got out from under the overhang had a very high marginal propensity to consume and private consumption demand would’ve been stronger.

Richard Vague:

I think that’s exactly right.

Rob Johnson:

And I thought that was a very, very interesting way of seeing. Now I can understand if you and I were on the deck when this ship hit the iceberg, that it might be difficult to have faith in things that were, that indirect and that the fortification of the core at all costs seemed imperative. But this played out over quite some time with the reluctance to restructure mortgages and write them down. I remember places like San Bernardino, California just suffered massively because the whole community was underwater for a long time.

Richard Vague:

As notable a presence as Steve Bannon attributes Trump’s election to the fact that we didn’t take care of those underwater mortgage holders in that period.

Rob Johnson:

Mm-hmm. And I think what has disturbed me, I’ll tell you an interesting story. There was a gentleman named Tommaso Padoa-Schioppa, former Economy and Finance minister in Italy. Good friend of mine, good friend of George Soros. He gave the last speech at the first INET conference in April, 2010, Cambridge university, England. And he came out and said, “As I see in INET’s mission, there are three kinds of sustainability, resource sustainability, and he’s referring to climate challenges, financial sustainability, which is ruptured here, and social sustainability. And eventually he’ll be grappling with all three.

Rob Johnson:

He sat down next to me as everybody clapped. And he said, “All of these are going to flow into social sustainability, Robert, because after this people are going to stop believing in governance.” And instead of what you might call a vision of a new deal response where the government rose to transform the system and stabilize things, what he was asserting was that the poison of failed governance, which spawned tea party on the right and occupy on the left would infect the trusts and faith in all areas of governance. And perhaps Donald Trump is the byproduct.

Richard Vague:

Without question, without question. As you know, I did a lot of focus group work across the country over the last couple years and ended up being in 12 states, probably first to 40 groups, half Republican, half Democrat, mixed demographics. One of the surprises to me was how predisposed folks were to believe the conspiracy aspect or the worst of, the idea that somebody behind the scenes was controlling everything, that’s disconcerting. That’s the very thing I think you were just describing.

Rob Johnson:

How do you feel based on visits and study that the Chinese government is doing in this realm of what you might call credibility with the body politic?

Richard Vague:

I tell you it’s hard to even grasp what it must be like to be a citizen of China with so much control. Folks have said that their 5G networks or ahead of ours, because the government is so committed to surveillance, that they need 5G systems for facial recognition and other things that facilitate that. It’s really hard to imagine. And I think China’s going to face any number of problems over the next decade or two. However, one thing that China has been doing right in my mind is they have been investing enormous sums very strategically in those innovations that I think will define the future, biotech, artificial intelligence, super computing, 5G, electric vehicles, quantum encryption, solar. The list goes on.

Richard Vague:

I’m very close to the research being done on cancer here in the United States at University of Pennsylvania, where they’ve made breakthroughs, where they can re-engineer the immune system to attack tumors and cure individuals in a matter of days who have terminal cancer. That work is just very inspiring. But China actually has, it came forward in the United States and China’s actually doing more work on this subject than we are at this point in time, because of the availability of government funding. We did an analysis of US direct sponsored government R&D. And since 1964, that has declined from 1.8% of GDP to about 0.6% of GDP. It’s down two-thirds. In the last decade, China has tripled.

Richard Vague:

One thing they are doing, for all their faults and for all the difficulty they will certainly face, they are making enormous strides in those areas and we lead, but our lead is tenuous. I think 10, 20, 30, 40 billion, more a year in government funding for the NIH, for the National Science Foundation and other areas would revolutionize this country. And yet that barely gets discussion in the halls of Congress.

Rob Johnson:

I’ve talked to numerous professors at universities, particularly in the natural science all over the country, Columbia University, Stanford and others, who are talking to me about how their university, New York University, another one, are opening laboratories in China, opening little, what you want to call outposts of sub campuses because they can tap in to large scale R&D funding that the American government will not do. And I’ve seen measures from the Silicon Valley people where Pio Milani runs our San Francisco office that suggests that the pure research underpinning technological development in cybersecurity and communications and digital commerce platforms in China is on the order of a magnitude of five times what the United States is putting forward. And all that’s upstream. It’s upstream.

Richard Vague:

And we sees scientists from the United States moving to China because their research will get funded.

Rob Johnson:

That’s right. You can talk about R&D, but D depends on R. It’s a sequence. And I think, how would I say, this is interesting now, but with China having a population that’s over four times the size of the United States is the income per capita moves up through the middle income trap, the scale upon which they can support public activities, not just the legitimacy associated with the structure of government, but the scale just because of the sheer size of the society can, how would I say, propelled them forward in ways that someone like Orville Schell who ran the US-China program for the Asia Society wrote about in his book, Wealth and Power, where he and John Delury who’s his coauthor said, after the opium war and after the humiliation of the Japanese invasion, the Chinese society will band together and will submit to government leadership to, which you might call eradicate, or make transient that humiliation and restore the middle kingdom.

Rob Johnson:

And on the other side, Orville and his co-author suggests that because the United States has been used to running the world system since World War II and expecting people to emulate them, that we are headed towards a very, very difficult time where two philosophical systems and a wounded reemergence is going to intersect with a proud leader, fearful of relative decline.

Richard Vague:

The population point that you just made is a very important point. And one that tends to get overlooked. The United States has had four big, what I would call, business rivals since its inception prior to China. First was Britain, of course, then Germany, then the USSR and then Japan. Well, in every one of those cases, the United States population was far greater than that rival. So in my mind, and I don’t want to be overly simplistic, but in my mind, it’s almost for ordained that whichever competitor has the biggest market, which tends to correlate to the biggest population is going to prevail over time. Our real challenge is the one you just articulated, our population’s 330, 340 million, China’s is 1.3 billion or 1.4 billion. It’s really going to test us to maintain parody much less a lead on China, just because of the sheer tonnage that comes with population.

Rob Johnson:

Yeah. And we also see a lot of frustration among large capital intensive American and knowledge intensive industries, what I would call they had the Pepsi or Coca-Cola fantasy. 1.4 billion people drinking Pepsi. The scale economies that people imagine with access to the Chinese market was quite inspiring, except what seems to take place, particularly in knowledge intensive industries, is that the diffusion of the process knowledge leads to the spawning of firms that are favored by the government that are purely domestic and our foreign direct investments, how do they say, at times feel squelched or feel constrained relative to their newfound competitors when they thought that they went in with a huge experience and knowledge advantage.

Richard Vague:

Yeah, I think China’s played this well. I think we’ve been snookered in a lot of cases.

Rob Johnson:

I think that there’s some clear resentment and you could even see it in papers by the Council of Foreign Relations prior to the time Donald Trump was running. People like, I think it was a man named Stillwell, Robert Stillwell, I believe, and Kirk Campbell and others were writing about all of the ways in which things were being thwarted. We’ll just start with Wall Street. The idea that we were going to go in and American financial sophistication was going to be used to modernize the domestic market in China, asset management companies from Goldman Sachs to Bridgewater were all going to thrive. And the, what you might call coupling the convertibility of the renminbi would make them just a segment or a chapter in the global financial market. But that all was not realized. And Wall Street, which was a very powerful lobby on behalf of China got somewhat demoralized.

Richard Vague:

Yeah. That’s exactly right. But we do have the great decoupling with China, which is happening and seems like it’s going to be hard to ever stop, does create opportunity for the United States. And one aspect of that is reassuring manufacturing. I’m working with a company right now that makes software that makes electric motors far more efficient, 80 or 90% more efficient. And yet they have to get those, and some of those are for like drones, and they have to go to China to get those made because Chinese manufacturers can make them for about $20, and US manufacturers would make the same thing for about $50. There’s kind of no comparison. However, there is retooling you could do, robotic retooling and other things that could bring the cost of manufacturing that same engine in the United States down pretty close to that $20. But it would take this company, for example, a couple of million dollars, which it doesn’t have lying around to do that retooling and there’s grants, scarce, hard to get grants that could transform manufacturing in the US, that would make our cost of manufacturing competitive.

Richard Vague:

And to me, that represents a great opportunity. But once again, as we were discussing a moment ago, there’s not a lot of thinking being done and not a lot of funding available to make that happen.

Rob Johnson:

Yeah. Let’s come back to Pennsylvania. You work as the secretary of banking and securities for the state. You mentioned in your earlier conversation, part of this conversation that the needs of state and local governments are going to be acute in this next phase. How are things unfolding in the state of Pennsylvania? What specifically do you see your home state needs and how does it interface with your role regarding banking insecurities?

Richard Vague:

Well, it is clearly a challenging time. And yet the Commonwealth of Pennsylvania has continued to move forward at the same financial pace because it hopes that Congress will provide the support that will allow that to continue. And that’s not just true of Pennsylvania. It’s true of Philadelphia. It’s true of states all across the country. So, so far so good, but we need Congress’ support to make that true. And a lot of programs and a lot of jobs are tied up in that. That’s why we said early on that’s a role Congress can play that can make a profound difference in the United States over the coming six to 12 months.

Rob Johnson:

But are we in a place now where, what you might call the election marketing of Democrats versus Republicans, creates a natural stalemate where each, they’re less concerned about passing legislation than exposing the flaws of their opponents. And so we wallow a little bit before an election.

Richard Vague:

I tell you, that could be it. That could be exactly what’s going on, and thus an impasse may remain until well after November 3rd, that would be unfortunate because many of these benefits as you know, expired last month, and some of these programs that were put on [inaudible 00:36:20] cares are running out of funding. States supplemented cares in some case with additional funding, all that’s coming to a conclusion before November 3rd. If this is a game of political chicken, it’s a deeply unfortunate thing because a lot of folks daily lives are being profoundly damaged because of that,

Rob Johnson:

I’ve also been reading about the relation. Peter Temin was my guest last week on this podcast. He’s just written a history since the early 1800s called Never Together about race relations in the United States. And he talked about how there is now a tension because the rising expense associated with law enforcement, the use of what I’ll call capital intensive weaponry as part of law enforcement, and the expense of running prisons and the scale in which people are incarcerated is together a cost that is encroaching upon the budget for health and the budget for education, particularly in urban areas like Detroit or Philadelphia or Oakland or Atlanta. And that the propensity has been with lots of lobbying on the behalf of powerful interests to sacrifice education and health and fortify law enforcement and the systems of incarceration.

Richard Vague:

Yeah. We’ve done a study of state and local spending from about 1970 forward. And the two areas that have seen, if you divided into GDP so that the numbers are comparable through time, you can see that the two areas that have lost out have been education and infrastructure, and that’s our schools and our roads. And we can see that. Folks like you and I travel around the world and we see these beautiful new roads and these bright, shiny airports. We’ll come back to the United States and see that we have not, in some cases, kept up on our spending. We see it in our schools where we have school buildings that are 50, 75 years old. We see funding that’s not keeping up on a per capita basis.

Richard Vague:

It’s heartbreaking and yet it’s real. States and local governments are not like the federal government, the federal government is unique in that it can create money, states and local governments cannot and are mandated to balance their budget. So everything you spend in category A is something less you spend in category B. And these are heart wrenching trade offs, because the needs are broad. But you’re exactly right, the people that are paying the cost are our students and that’s going to have a long term impact.

Rob Johnson:

Yeah. I remember the late Paul Volker saying to me when we were at a seminar together, and people were talking about the buying of impaired mortgage derivatives off of the balance sheets of banks by the Central Bank, in order to fortify the credit worthiness of the financial system. And Volker said to me, “There’re going to be people like Ron Paul and others who despise the Fed and the Fed’s independence, and they’re going to say, these guys are picking winners and the winners they’re picking are the guys that made the mess.” And he said, “And when they cut off improvements of infrastructure, when they have a county like Stockton or a community like Stockton, California, and they cut back law enforcement as crime is rising, when they close hospitals and when they lay off teachers, because these municipalities have to balance their budget. The access to finance, the people are going to be outraged and they are going to say, the Fed is not independent. It’s picking winners. And we are the losers and the bankers are the winners.” And low and behold, I heard a whole lot of that kind of music over the following seven or eight years.

Richard Vague:

And we’re hearing it again and with some justification. The Fed has moved boldly and introduce an unprecedented array of programs. And we have seen quite a vocal response criticizing the Fed for picking winners, but I also hear it express differently. It’s almost like preserving winners. It was the elite financial class that was already winning. And by doing this, they’re preserving these winners.

Richard Vague:

Well, there’s a certain validity in that criticism relative to what the Fed is doing now, but the Fed is not a legislative body. The Fed can only act to preserve the status quo financial markets. It’s up to the legislative body to make changes. And I’d be the first in line to say, we ought to be doing more for this constituency and less for that constituency. The Fed acted. I think the only way it could act, by and large, you can nitpick some of the details, but the Fed can only really do one thing. And that’s be a lender of last resort. And that’s why the Fed was created. That is the reason. We talk about controlling inflation, creating jobs. None of those were the reasons, that came later. They’re the lender of last resort.

Rob Johnson:

Yeah. The early central banks were there to accumulate war finance. Then they spread as lender of last resort and financial crisis mitigation. And the macro stabilization was the last ingredient.

Richard Vague:

They have played their lender of last resort role to the hill here. And if that means preserving some disparities that folks lament, they’re justified in that lament, but the Fed had to act in a week or a month, the Fed didn’t have a year to wait to parse out those differences.

Rob Johnson:

That’s right. That’s right. I think that notion though, of fortifying the strongest feeding back into the conversation about money and politics, the legislature sculpts in a highly concentrated income and wealth society to inspire donors. And how would I say, give incumbents and advantage relative to challengers. And in that world of money politics, one would predict that fortifying the strong with the strong being capable of financing the war chest for elected leaders would be a systemic outcome and somewhat what you might call refractory towards wealth and away from broad based representation. And I think as a society, we’re going to have to explore that in the, what you might call lessons learned and the architecture. But you’re right. That’s not the Fed’s discretion to do that. They are given the funding with a mandate that is designed and passed into law by the legislative branch. And for that matter, the White House.

Richard Vague:

I can remember you correcting me one time in a way that I’ve never forgotten. I was lamenting, I was giving my little historical panoramic view of how the United States has had an industrial policy for 200 and something years. The government played a huge role in canals and railroads and development of financial markets and real estate market. The government’s role and in directing industrial policy within the United States has been massive. Recently reinterpretation of history not withstanding. And I was lamenting.

Richard Vague:

I think one of INET’s friends has recently said, all 12 of the major components of the iPhone come straight from government research and GPS, the internet, touchscreen technology, and the like. So the government’s always been there. And I was lamenting the fact that the government didn’t have an industrial policy anymore. And you correct me and said, “Oh yes, they do.” And it’s really all about the financial institutions in real estate these days more than AI biotech, super computing 5G, EV quantum encryption, solar, and the like. I’ve never forgotten that. And you were absolutely right, we need to redirect government’s emphasis towards things that are more about the future.

Rob Johnson:

Yeah. Well, I remember the year before Dodd-Frank passed. As you know, Obama wanted to pass the healthcare bill. And as I watched what was unfolding, I looked at things like Center for Responsive Politics and some of these other websites and where they aggregated by sector. In the year of the healthcare bill, the financial sector was by far the largest donor to politics, almost double the amount of the money that the healthcare sector came forward with in the year when their legislation was on deck.

Rob Johnson:

Now, I would say the financial sector was prescient, because they knew the next year, very, very profound and major legislation would be, what you might call, in the batter’s box. But understanding the influence of money and how it’s grown over time and how courts have allowed it to be more disguised and larger scale and more permissive and equated financial donations with some kind of freedom like speech. I think these elements of our architecture are very, very profound and need to be explored and reexamined to create what proto scope are referred to as a sustainable society.

Richard Vague:

Yeah.

Rob Johnson:

And people and people who are beautifully gifted, who can make lots of money are at risk if an authoritarian despondent system replaces our democracy. And what you might call in that, rumble and distrust and dysfunction. Their creativity can’t be realized like it once could.

Richard Vague:

Absolutely. That nobody needs the middle class more than folks like that.

Rob Johnson:

Yeah. Well, as we look onto the horizon, you’ve alluded to some very important things related to state and local finance and the tensions between sides for what you might call the next bill. What would you like to see passed? I’m not saying Republican, Democrat, I’m saying what’s inside the bill you would like to see fortifying the American economy as we work towards a vaccination and a recovery over these perhaps many months?

Richard Vague:

The obvious ones to me, I think the amount will need to be at least a couple of trillion. I see a disproportionate amount of that going directly to households and also to bridge the gap for state and local governments. To me, those would be the principle things. I think it’s an opportunity to increase funding for basic research around study of the immune system, viruses and vaccines. Those are the things I would think should have the highest priority.

Rob Johnson:

And what about sectors in terms of financial restructuring? Where can we, how would I say, alleviate pain? What overhangs do you see in finance that inhibit a resumed vitality for our society?

Richard Vague:

The thing that I have done a lot of work on, as you know, over the last decade or two has been private sector debt, which I think, government sector debt gets all the attention, especially in a period like now where it’s going up so quickly, but private debt is larger than public debt right now. It’s approaching 33 trillion versus public debt, which is about 23 trillion. It’s the student debt and mortgage debt and other debt that households have. It’s the line of credit that a small business has, and we are at all time highs right now.

Richard Vague:

Our current estimate is that private debt to GDP, which is I think the right way to think about it, to compare it through time is over 160%. And that’s the thing that gets far too little emphasis and far too little discussion. It is the thing that is burdening households and burdening small business. It is the thing that makes it harder to invest more, spend more, send a kid to college, add a new store for a small business in store locations. To me, that is the most important thing that is least discussed in thinking about how our economy can and should move forward. And that was true before the pandemic, it’s especially true now.

Richard Vague:

So thinking of constructive ways to reduce that debt pressure is something that occupies a lot of my thinking. For example, right now, someone who gets a student loan and then works for 10 years in the not-for-profit or government sector can get that loan forgiven. Perhaps we can do something similar for folks that go to work in the for-profit sector if they do a certain amount of not-for-profit volunteer work. We have to find creative ways to give students that have debt a light at the end of the tunnel.

Richard Vague:

If we go back to underwater mortgages, I think in 2010, if I’d have had a magic wand, I would’ve created a dispensation for banks to write down the mortgages current market value. But instead of having to take that loss immediately, given them a dispensation to take that loss over 30 years while getting the upfront tax benefit of that write down. That would’ve created an enormous benefit as you were talking about earlier. I think there’s a similar program we could consider for healthcare related debt. So there’s certain areas like there where we need to get creative, give folks a fighting chance on debt, clean up America’s collective balance sheets, and that’s going to propel us forward in a more vibrant way.

Rob Johnson:

Well, Richard, you’ve covered a lot of bases here in [inaudible 00:53:49], inside the financial system, historically. I guess before we leave, I want to ask you to foreshadow your book on the Illustrated History of American Business. What inspired you to create that book, and what is it that you hope to impart to us next spring when it’s released?

Richard Vague:

Well, you’re very kind to let me talk about it. I’m very excited about this book. My first two books were about financial crises. I had a thesis that I had to argue and that made those books more difficult propositions. This book really came out of the fact that when we were exploring financial crisis back in the late 1700s, early 1800s, we found that there was a posity of financial. I asked for a list of who the wealthiest Americans were CERCA 1800, no such list existed. I asked what were the largest business CERCA 1820, no such list existed. For all the work that’s been done on social history and military history and government history and the like relative positive work has been done on business history. So we put our team to work reconstructing that data.

Richard Vague:

So we’ve written a book. We use pictures in it because there are irresistible images, especially during the 1800s, mechanical drawings of inventions and maps and the like, but we’ve divided US business history into 14 eras. And we really start in 1748 with the Ohio Company of Virginia, of which George Washington was involved. And this was the great land grabs that happened in the early part of American history. And we take you through. But for each of the 14 chapters, we have the 10 wealthiest people in America. We have the 10 largest business, the 10 largest banks, the largest industries, the key inventions. It’s a very list oriented book. We’ve written a narrative of the businesses that were founded and so forth and so on.

Richard Vague:

I think folks that have even a passing interest in American industry are going to love this book. I love it, and I’m biased of course, but it’s coming out in April. And I think it’s just going to give a perspective to American history that I think’s important. And by the way, it’s warts and all, because the history of American business is much about calamity as it is about achievement. It’s as much about fraud as it is about vision. American businesses, when we succeeded, we seeded mightily. When we failed, we failed catastrophically. And so we’ve got both in this book and I think it gives an important perspective on understanding our history that’s useful when we think about things today,

Rob Johnson:

Well, they say that there’s good and evil in everything. And it sounds as if you’ll cover all of that in both dimensions in your book. But in this evil context, I must say that I think I’ve had a very good day listening to you. And I believe my audience would agree. I want to thank you for being my guests here today, for exploring so many things so lucidly. And I want to ask you right now, next April, when your book comes out to reappear and we’ll have a conversation focused on that at the time.

Richard Vague:

Oh, it would be a real privilege. I appreciate that.

Rob Johnson:

Great. Well for now, thank you, Richard. Thank you for being a part of INET’s board and thank you for all the things you write and illuminate and thank you for today’s conversation.

Richard Vague:

Thank you.

Rob Johnson:

Bye-bye.

Rob Johnson:

And check it out more from the Institute for New Economic Thinking at ineteconomics.org.