Sen. Elizabeth Warren (D-Mass.) wants to scare the pants off Americans. She recently posted a piece on the website Medium entitled, “The Coming Economic Crash – and How to Stop It,” detailing the reasons our country could be heading toward another financial crisis.
Her analysis is riddled with misrepresentations. But her alarms will cause some to question the soundness of the economy, which of course is exactly her purpose.
Candidate Warren and her fellow Democrats want to shake the nation’s confidence in our strong economy, knowing that rising wages and strong job creation are President Trump’s greatest asset as he heads into his 2020 reelection campaign. For the past year, the liberal news media has lofted one worrisome reason after another why growth might slow, including the trade spat with China and the government shutdown earlier this year, only to be disappointed in its resiliency.
Warren is singularly invested in deprecating the economy. In her piece, she relives her glory days during the financial crisis, when her attacks on banks brought her to the country’s attention and, ultimately, led to her election to the Senate.
That was a decade ago, however, and though many still suffer the aftereffects of that devastating period, Warren’s crusade against the financial industry is no longer front-of-mind for voters. She should have run for president in 2016, when memories were fresher, but she deferred to Hillary Clinton. That was a mistake for her.
Today, Warren is spinning out a new policy paper every few days, but none has had the resonance of her anti-bank vendetta. She wants to cancel student debt, make college free, provide a $15 minimum wage and a host of other liberal policies—but so do Bernie Sanders and other progressives in the race.
Warren misses the good old days, when she stood atop the financial wreckage and claimed victory with the passage of tough new regulations. She wants to bring back those days, if only in our imaginations, and so is proclaiming the economy to be unsound. Moreover, she wants us to know: Only she can fix it.
Warren’s main concern is that, in her words, “I see a precarious economy that is built on debt.” She says in particular that households have taken on more debt “than ever before.” She notes that credit card debt is at the same level it reached in 2008 and that auto loans are the highest they’ve ever been.
These observations sound scary, but they are not. In a growing economy, and especially one enjoying low interest rates, borrowing is bound to rise. What Warren does not say is that the values of household assets are growing, too. In fact, Federal Reserve data show that the balance sheet of the consumer is in better shape than it has been in some time.
At the end of 2008, household assets like homes and investments totaled $74.4 trillion; by the end of last year that figure had soared to $113.1 trillion. Total household debt over the same period rose from $13.2 trillion to $15.1 trillion. In other words, consumers added to their net worth by $24 trillion during those years.
In the first quarter of this year, which is the latest period for which we have data, that positive trend continued. Fed data show household debt increased 3.5 percent compared to the year-earlier period. But the value of consumer assets increased even more, by 4.7 percent. The balance sheet gets stronger by the month.
Another way of assessing the security of the consumer requires looking at how able households are to service the debt they owe. According to other Fed data, household debt-service payments as a percentage of disposable income in the first quarter was 9.9 percent, below historical levels and far less than on the cusp of the last recession, when consumers were paying over 13 percent of their income on their borrowings.
Warren extends her concerns to the rise in corporate debt as well, writing that “leveraged lending – lending to companies that are already seriously in debt – has jumped by 40 percent since Trump took office, spreading ‘systemic risk’ throughout our financial system.” It is true that this type of financing has grown, mainly because business managers are going to find 2 percent borrowing rates irresistible.
Much of the leveraged loan issuance relates to private equity (PE) investments, another target of Warren’s. In her usual nuanced fashion, Warren has recently called private equity managers “vultures” for “looting” American companies and industries.
The truth is that money has piled into private equity funds because they are among the few investments earning returns adequate to meeting the ongoing earnings needs of pension funds and insurance companies. Those entities cannot survive on 2 percent interest rates; the ability of PE managers to bolster growth and returns on their portfolio companies has nothing to do with looting, and everything to do with harvesting value and opportunity.
In any event, the default rate on leveraged loans in May was 1 percent, only slightly above the 0.93 percent seen in March, which was a seven-year low, and well below the historical average of 2.93 percent. Fed Vice Chair for Supervision Randal Quarles in May downplayed the riskiness of the leveraged loan business, saying the media has blown concerns out of proportion, with stories analogous to “the Earth must be getting hit by an asteroid” and concluding that the build-up of debt is not comparable to the mortgage market collapse that triggered the financial crisis.
Elizabeth Warren knows this. She also knows that an inversion of the yield curve, which she points to with alarm and which took place recently, is no longer believed to be a solid indicator of a coming recession, thanks to the increasing role the Fed plays in setting rates.
Warren is not stupid, she’s just self-interested. Nothing could be better for Democrats hoping to retake the Oval Office than a recession. Nothing could be better for candidate Warren than being the one who can say: “I told you so.”
Published on The Hill