Fed Chairman: Business Debt is at Record Highs, But It Is Different This Time

On Monday, Federal Reserve Board Chairman Jerome Powell spoke at the "Mapping the Financial Frontier: What Does the Next Decade Hold?” 24th Annual Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta and held in Amelia Island, Florida.

During the speech, he acknowledged the sizable debt held by businesses:

Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect. If financial and economic conditions were to deteriorate, overly indebted firms could well face severe strains. 

But he thinks things are different now compared to the period before the Great Recession:

Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect. If financial and economic conditions were to deteriorate, overly indebted firms could well face severe strains. However, the parallels to the mortgage boom that led to the Global Financial Crisis are not fully convincing.

He concluded the speech this way:

First, business debt is near record levels, and recent issuance has been concentrated in the riskiest segments. As a result, some businesses may come under severe financial strain if the economy deteriorates. A highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments. Investors, financial institutions, and regulators need to focus on this risk today, while times are good.

Second, today business debt does not appear to present notable risks to financial stability. The debt-to-GDP ratio has moved up at a steady pace, in line with previous expansions and neither fueled by nor fueling an asset bubble. Moreover, banks and other financial institutions have sizable loss-absorbing buffers. The growth in business debt does not rely on short-term funding, and overall funding risk in the financial system is moderate.

First, do note the area I have highlighted. No asset bubble?

The stock market since 2008 has more than tripled:

This is an asset bubble.

Powell must have been nervous about his claim because in the end he hedged is "things are different this time claim":

Third, we cannot be satisfied with our current level of knowledge about these markets, particularly the vulnerability of financial institutions to potential losses and the possible strains on market liquidity and prices should investors exit investment vehicles holding leveraged loans. We are committed to better understanding the areas where our information is incomplete. 

The information he needs to understand the current economy is out there.  It is called Austrian Business Cycle Theory, which in essence says that if a central bank pumps money into an economy, the economy will boom at the point of the infusion, when the Fed stops pumping, or severely slows pumping, the bust occurs in those sectors that are no longer propped up by Fed money printing.

The printing will eventually slow or stop again and the crash will come.

Murray Rothbard explained the details of the theory and why the crashes occur, see Austrian Business Cycle Theory. I doubt Powell is even aware of the theory. My experience with top Fed economists (see: The Fed Flunks) is that they have no clue.


Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.