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Bernanke's Triumph

Corporate and Financial Debt Soar to Pre-crisis Levels

by MIKE WHITNEY

There’s an excellent article in Thursday’s Wall Street Journal that details the ruinous impact of the Fed’s monetary policy. While the real economy has seen no benefit from the Central Bank’s zero rates and quantitative easing (QE), corporations and financial institutions have gone on a borrowing binge that has boosted their leverage to precrisis levels. Keep in mind, that it was the bursting of the gigantic credit bubble in subprime mortgage-backed securities (MBS) that imploded the global financial system triggering the deepest slump since the Great Depression, so you might think the Fed would want to avoid a similar mishap in the future. Au contraire! As the WSJ article confirms, the Fed’s lamebrain monetary policy has returned us to Square 1, the same place we were 5 years ago when the roof caved in and the whole bloody financial system came crashing down in a heap. Here’s an excerpt from the article titled “Financial Crisis Anniversary: For Corporations and Investors, Debt Makes a Comeback”:

“Five years after excessive debt propelled a housing-market collapse into a financial crisis and recession, similar bets are being placed across the U.S…..Leverage is getting back to where it was precrisis,” said Christina Padgett, head of leveraged finance research at Moody’s Investors Service….

Total corporate-bond debt has grown to nearly $6 trillion, up 59% since 2007, the year before the financial crisis……Leverage by companies rated investment grade has risen 20% since 2010 … about 6% higher than in 2008, according to J.P. Morgan Chase JPM -0.48% & Co. ….

Small investors are increasingly partners in the corporate-borrowing surge. In 2008, mutual funds held, on average, 17% of the bonds and 3% of the loans made to junk-grade companies, according to Bank of America. Today, they own about 26% of the bonds and 19% of the loans….

Assets in mutual funds and exchange-traded funds that invest in junk bonds have grown to $285 billion in July from $92 billion at the end of 2008, according to Morningstar.” (“Financial Crisis Anniversary: For Corporations and Investors, Debt Makes a Comeback”, Wall Street Journal)

So everyone’s piling into the debt markets in response to the Fed’s uber-accommodative policy, right? So while the Fed’s QE and zirp (zero interest rate policy) have had zilch effect on unemployment, the output gap, wages and income, consumer spending, aggregate demand, corporate investment or even inflation (which is still bobbing below the Fed’s 2 percent target); they have fueled a borrowing spree that’s pushed NYSE margin debt and stock prices to record highs, while junk bond yields have dropped to all-time lows. In other words, Helicopter Ben has inflated another ginormous stock and bond bubble that will eventually explode in a spectacular fireworks display leaving the financial system and the economy in tatters.

Hooray, for Bernanke, Ponzi-charlatan extraordinaire! Maestro must be green with envy. Here’s more from the article:

“Many companies are repeating some of the mistakes of the past,” by taking on too much debt, said Edward Altman, a New York University business school professor and the creator of a well-known tool for measuring corporate health, called the Z-score.

Mr. Altman said his latest forecast, which measures the probability of corporate defaults, showed overall corporate health was “no better than it was in 2007 and by some measures worse.” (WSJ)

Altman is obviously a party pooper. What does he know about self-balancing equilibrium of the free market? If debt is all that bad, then why are so many corporations and big banks loading up on more leverage all the time? Huh?

Could it be because zero-priced capital and $85 billion in monthly liquidity injections distort the pricing mechanism, drives down interest rates and sends investors scrambling for yield wherever they can find it? Could it be that Bernanke’s dogwhistle policies force risk-adverse fixed-income investors and penny-pinching retirees into volatile equities and other unsavory bets so they can make sufficient return on their life savings to keep the wolves away from the door?

Sure, it is. You see, Bernanke takes a two-pronged approach to the Fed’s “price stability” mandate. On the one hand, he keeps dumping enough Vodka into the punchbowl to keep everyone at the party permanently blottoed, and with the other, he puts a gun to the head of every cautious saver in the country who would prefer to keep his money in a deposit account, but is coerced by Bernanke’s zero rates to dive back into the equities sharktank where he’ll be stripped-to-the-bone by the Wall Street piranhas. Isn’t that the Fed’s policy in a nutshell? Here’s more from the article:

“Student loans, up 71% over the past five years, are approaching $1.2 trillion; in March last year, a third of the riskiest loans were more than 90 days past due, up from 24% in 2007, according to TransUnion LLC.” (WSJ)

Sure, let’s feed-off our young so we can keep Bernanke’s Three-Card Monte game going a bit longer. What difference does it make?

What a sick, twisted system. 12 million people can’t find work, wages have been stagnant for over a decade, 47 million people are on food stamps, household income is down more than 8 percent since 2000, consumer spending is on the ropes (personal spending rose a meager 0.1 percent in July), the homeless shelters are bulging, the food banks are maxed out, and the unemployment rate just dropped to 7.3 percent because–get this—another 312,000 workers threw in the towel and gave up looking for a job altogether. Get the picture: The US economy is in the shitter!

Meanwhile–while the financial system teeters and the country goes to hell– the geniuses at the Central Bank keep juicing the money supply and boinking rates to help their rich slacker friends get richer still. What a racket.

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on the Fed’s quantitative easing disaster appears in the August issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.