It’s been almost seven years since I wrote Debt and Delusion. So naturally, readers have a right to ask, “Why produce an updated version at this time?” There are at least three reasons, the cheapest of which is that the author is surprised and flattered to find that it is in demand and there has long ceased to be any supply.
More than that, like an abandoned mine, the book stands as a monument to what was already known about the global credit expansion and the strains in the financial system before the halving of equity market prices from the early 2000 peaks. Most importantly, and sad to say, this equity market trauma foreshadows even more disastrous results of the financial folly that has reached proportions unimaginable in the summer of 1998. And so, the primary function of the book — “as a timely warning of the perils that lie ahead” — remains valid.
Debt and Delusion exposes serious flaws in the development of the global financial system starting in the early 1990s, singling out the world’s largest central banks for special criticism. Their negligent oversight has permitted an explosion of corporate and household credit that has fueled a succession of false markets in stocks, bonds, and property. Alarmed by the monster so created, the U.S. Federal Reserve has spent much of the past five years staving off the evil day when foolish lending turns into bad debt.
Far from being the architects of economic stability and low inflation, the world’s central bankers have ushered in a new era of financial fragility and latent instability. Innovations in the use of derivatives, structured products, and other complex financial instruments have been applauded by the central banks on narrow technical criteria. But these supposed bastions of conservatism have failed to comprehend the wider implications for financial stability.
From poorly documented home loans to sub-prime auto loans to subordinated corporate debt and junk bonds, permanently easy access to credit has compromised economic management in the U.S., U.K., and other English-speaking nations and has fostered an illusion of prosperity and well being.
Lamentably, this staggering collective flight from reason has been endorsed by the economics establishment.
The failure of many of the finest economic minds to engage with the rapid evolution of our financial structures and institutions has led to a superficial assessment of this unprecedented credit experiment. Only now, as various credit markets face the inevitable tests of higher interest rates and the realistic pricing of credit risks, is the threat of a pandemic of debt-related distress beginning to be taken seriously. Government budgets, already strained by the weight of social support, have limited scope to respond.
In short, tougher economic times lie ahead, when personal debts will hang more onerously than for 75 years. Debt and Delusion recommends a hasty! reappraisal of the debt requirements of corporations and households alike.
Peter Warburton
September 2005
Good Discussion @ Mises Institute Website Robert Blumen discusses Peter Warburton’s “Debt and Delusion: Central Bank Follies that Threaten Economic Disaster” at the Ludwig von Mises Institute Website.”Published in 1999, the work rapidly went out of print but has since become a cult classic among financial contrarians. Although not written from an Austrian point of view, the argument parallels an Austrian view of money and banking in many aspects. My purpose in writing this article is to present Warburton’s main argument…
A tour de force If someone were to say to me, “Prove that the 2007-2009 financial crisis had its origins long before George Bush, Alan Greenspan, the 2001 rate cuts, subprime mortgages and greedy Wall Street CEOs” I would have them read this book. Written in 1999, it’s staggering how much Peter Warburton, who I had never heard of before reading this book, understood. It’s dense but fairly short, less than 300 pages not counting appendices. One of his key insights is explaining how the credit growth of the…