FacebookTwitterGoogle+RedditEmail

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.

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. He can be reached at fergiewhitney@msn.com.

May 04, 2016
Kshama Sawant
It’s Not About Bernie: Why We Can’t Let Our Revolution Die in Philadelphia
Conn Hallinan
Baiting the Bear: Russia and NATO
Joshua Frank
Hanford’s Leaky Nuke Tanks and Sick Workers, A Never-Ending Saga
Paul Craig Roberts
TIPP: Advancing American Imperialism
Ted Rall
Hillary to Bernie Supporters: Don’t Vote for Me!
Eric Draitser
Hillary Clinton and Wall Street’s Neoliberal War on Latin America
Leslie Scott
The Story of Jill Stein: Putting People, Peace and the Planet Before Profits
Ann Garrison
Building the Greens Into a Mass Party: Interview with Bruce Dixon
Tom Clifford
Crying Rape: Trump’s Slurs Against China
Lawrence Davidson
Getting Rid of Bad Examples: Andrew Jackson & Woodrow Wilson
Ellen Brown
Bank of North Dakota Soars Despite Oil Bust: A Blueprint for California?
Nelson Valdes
Is Fidel Castro Outside or Part of Mainstream Thinking? A Selection of Quotes
Jesse Jackson
Don’t Send Flint Down the Drain: Fix It!
Nathan Riley
Help Bernie Keep His Halo
Rivera Sun
Remembering Nonviolent History: Freedom Rides
Clancy Sigal
Rachel and the Isolationists: How Maddow Blew It
Laura Finley
Changing the Conversation About “The Woman Card”
CJ Hopkins
Coming this Summer … Revenge of the Bride of Sophie’s Choice
May 03, 2016
Gary Leupp
Hillary Clinton’s Foreign Policy Resumé: What the Record Shows
Michèle Brand – Arun Gupta
What is the “Nuit Debout”?
Chuck Churchill
The Failures of Capitalism, Donald Trump and Right Wing Terror
Dave Marsh
Bernie and the Greens
John Wight
Zionism Should be on Trial, Not Ken Livingstone
Rev. John Dear
A Dweller in Peace: the Life and Times of Daniel Berrigan
Patrick Cockburn
Saudi Arabia’s Great Leap Forward: What Would Mao Think?
Doug Johnson Hatlem
Electoral Votes Matter: Hillary Clinton or Bernie Sanders vs Donald Trump
Chris Gilbert
Venezuela Today: This Must Be Progress
Pepe Escobar
The Calm Before the Coming Global Storm
Ruth Fowler
Intersecting with the Identity Police (Or Why I Stopped Writing Op-Eds)
Victor Lasa
The Battle Rages on in Spain: the Country Prepares for Repeat Elections in June
Jack Rasmus
Is the US Economy Heading for Recession?
Dean Baker
Time for an Accountable Federal Reserve
Ted Rall
Working for US Gov Means Never Saying Sorry
Dave Welsh
Hunger Strikers at Mission Police Station: “Stop the execution of our people”
John Eskow
The Death of Prince and the Death of Lonnie Mack
May 02, 2016
Michael Hudson – Gordon Long
Wall Street Has Taken Over the Economy and is Draining It
Paul Street
The Bernie Fade Begins
Ron Jacobs
On the Frontlines of Peace: the Life of Daniel Berrigan
Louis Yako
Dubai Transit
Bill Quigley
Teacher, Union Leader, Labor Lawyer: Profile of Chris Williams Social Justice Advocate
Patrick Cockburn
Into the Green Zone: Iraq’s Disintegrating Political System
Lawrence Ware
Trump is the Presidential Candidate the Republicans Deserve
Ron Forthofer
Just Say No to Corporate Rule
Ralph Nader
The Long-Distance Rebound of Bernie Sanders
Ken Butigan
Remembering Daniel Berrigan, with Gratitude
FacebookTwitterGoogle+RedditEmail