'Whiff of 2008': Nobel laureate pinpoints overlooked economic problem brewing

An economic issue which has so far gone unnoticed could be the makings of a 2008-level crisis, a Nobel Prize winner has warned.

Paul Krugman believes that, while there is no immediate danger of an economic collapse, there is an issue present that has not yet been addressed by Donald Trump's administration. In his latest Substack, where he noted a "whiff of 2008 in the air," the economist highlighted private credit loans as a future problem for the United States.

He wrote, "What happens with private credit is that investors entrust their money to managers who promise to lend it out in smart ways — typically loans to private businesses, that is, businesses that aren’t listed on the stock market.

"Such lending is effectively hidden from public view. Unlike banks, private credit companies don’t have to disclose their loans. Unlike listed companies, privately owned firms don’t have to disclose their finances. And unlike bonds, private loans don’t have to be disclosed to the Securities and Exchange Commission.

"In effect, private loans are treated as interactions between consenting adults. The rest of us have no legal right, and, presumably, no need to know what took place.

"Indeed, there are no official numbers on the size of private credit, although industry sources put it at something like $1.5 trillion. What’s clear is that it has grown explosively in recent years."

The trouble with private credit companies, Krugman says, is where said companies get their money from. Though the collapse of private credit alone would not be enough to cause a crash, compounded with other economic issues, it could be enough to trigger a crash, the veteran economist suggested.

"...private credit companies have in fact borrowed large sums from banks, mostly in the form of revolving credit lines," he wrote. "This means that banks might suffer losses if private credit companies fail.

"But these loans are generally senior to credit companies’ other obligations, so bank losses will be minor unless private credit suffers very badly.

"For those who remember 2008, arguments like the one I just made — that private credit may be troubled, but it’s not big enough to cause an overall financial crisis — sound a bit like famous last words. After all, similar arguments were made in 2007 about why we shouldn’t worry about the effects of the subprime crisis.

"While it’s important to get a handle on what is happening with private credit, it will only be truly destructive if problems with private credit are part of a broader story involving complacency and over-extension across financial markets. The question is, how big is the overall story of overreach? Or to put it another way, how many cockroaches are there?"