One of the things we learned from the likes of Hyman Minsky and Charles Kindleberger has been that stability breeds instability. The seeds of the next financial crisis are often sown in the previous expansion, and the best way to predict which part of the economy will be the catalyst for the next financial crisis is to simply look at who is taking on the most credit/leverage during the previous expansion. While there does not always have to be a crisis, when there is, it is often the result of excessive leverage built against increasingly speculative underlying assets, coupled with duration mismatching. Minsky and Kindleberger also believed that crises were less the result of surprise exogenous shocks, but rather more often endogenous, i.e., the result of cumulative bad balance sheet behavior built up over time, which was finally coming home to roost. At this point, as Warren Buffett tells us, we get to see who’s been swimming naked.
With that in mind, one topic we have increasingly been receiving questions on over the last few weeks has been private credit, and in this Economics Weekly, Richard de Chazal addresses concerns about whether recent emerging issues in the space pose a systemic threat to the banking system and the wider economy.