Is a Private-Credit Crisis Imminent?
The rapid expansion of opaque and minimally regulated lending outside the traditional banking system over the past 15 years largely flew—as intended—under regulators’ radar. Now, however, signs of trouble in shadow banking are multiplying, with rising redemptions and notable fund failures stoking fears of a 2008-style crisis. Though we might not be headed toward a meltdown just yet, regulators, especially in the United States, are turning a blind eye to the growing risks.
On the surface, lending markets aren’t showing stress. Spreads are crazy tight (this is a side effect of QE – too much money compresses spreads). Defaults on market-traded bonds are low. Inter-bank lending is getting stressed, but that’s because the Treasury is forcing its underwriter banks to buy too many T-bills they can’t resell, not because the banks themselves are unhealthy (it’s a sign of government credit stress, not private credit stress). Credit markets are actually looking really good.
That’s not proof that private credit isn’t in trouble, but on the flip side, what’s the proof that it is?
And furthermore, I’m not convinced that a private credit bust would lead to broader economic disaster, because of our bailout-happy Fed. They will buy up shitty loans from those guys and move them onto the public balance sheet in two seconds.
The big, systemic risk I see at this point isn’t deflation, it’s inflation.
h/t ThisKarmaLimitSucks