Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
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  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
Upside of Inequality Oxford Unintended Consequences

AI Summary. Private credit and direct lending have not rewritten the rules of credit risk, and much financial innovation amounts to repackaging risk in higher-fee wrappers. High-yield bonds followed a comparable path: after the 1980s boom, below-investment-grade default rates reached roughly 10.4% and 9.1% before the market matured.

Greg Obenshain Verdad
Date Posted:

.@GregObenshain argues direct lending, at $574B in June ‘23, 46% as large as the $1.25T high-yield market, is in “the calm before the storm,” that will be followed by a “default spiral.”

Has private credit rewritten the rules of credit risk?

Core argument: Moody's below–investment grade default rate hit 6% starting in 1989 and spiked to 10.4% in 1990 and 9.1% in 1991, following the junk bond boom of the 1980s.

In our view, neither private credit nor direct lending have rewritten the rules of credit risk. We’d argue that what passes for innovation in finance is often just repackaging risk in more convenient and higher-fee wrappers. To cite just one example of risky lending that grew rapidly, faced a reckoning and then developed into a more stable, mature market, look no further than high yield. The junk bond boom of the 1980s was built on the idea that the historical performance of high-yield bonds more than compensated for their higher risk. At its core, this idea has proved to be correct, but it was taken to extremes. After the boom in the 1980s, the Moody’s below–investment grade default rate hit 6% starting in 1989 and spiked to 10.4% and 9.1% in 1990 and 1991. But what developed afterwards was a mature market that is now tame compared with its history. We suspect that private credit will follow a similar path.

Takeaways by Macro Roundup® AI

  1. Moody's below–investment grade default rate hit 6% starting in 1989 and spiked to 10.4% in 1990 and 9.1% in 1991, following the junk bond boom of the 1980s.
  2. The authors argue that neither private credit nor direct lending has rewritten the rules of credit risk, and that much of what passes for financial innovation is risk repackaged in more convenient, higher-fee wrappers.
  3. High yield matured after its 1980s boom and reckoning into a market now tame relative to its own history, a path the authors suspect private credit will follow.

Related Articles:

  • Private Credit: Characteristics and Risks — Private credit loans are negotiated bilaterally outside traditional regulatory requirements and are illiquid because no secondary market exists, leaving investors expected to hold them to maturity or face steep losses if they need to exit. Scarce data on this growing form of nonbank lending makes assessing its risks difficult.
  • Where Are All the Defaults? — One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.
  • Corporate Debt, Boom-Bust Cycles, and Financial Crises — Using a dataset on sectoral credit exposure for 115 economies, the authors find corporate debt accounts for two-thirds of credit expansion before financial crises and three-quarters of nonperforming loans during busts, and that corporate debt expansions predict crises similarly to household debt. Recoveries are slower after corporate debt booms.
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