The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

The Banks Prepare the Next Economic Crash

Jul 22, 2019

In early May, the Federal Reserve issued a warning about the big build-up of corporate debt: “Borrowing by businesses is historically high ... with the most rapid increases in debt concentrated among the riskiest firms....”

This was the Federal Reserve’s second warning in less than six months and it comes on top of warnings from other big institutions and top economists. But none of these warnings have even slowed the build-up of corporate debt. Over the last 10 years, corporate debt has doubled and now stands at over nine trillion dollars. Measured against Gross Domestic Product (GDP), it is higher than it has been in over half a century.

And what is all this debt for? Businesses have been borrowing simply to further enrich the capitalist class. They have been borrowing either to speculate, to buy up their rivals, or just to increase dividends and buy back their stock in order to raise their stock price. None of this debt is for anything socially useful for ordinary working people or for the running of society.

Even worse, as the Federal Reserve report states, the fastest growing part of this debt is the riskiest, for companies which already have extremely high levels of debt. These “leveraged loans” as the banks call them, increased by more than 20 per cent in just the last year and estimates are that they stand at between one and two trillion dollars.

Banks make these kinds of loans because they are so profitable. Banks take advantage of the risks by charging big fees. The banks then turn around and make more profits by bundling the leveraged loans together into financial securities, which the banks sell to pension funds, insurance companies, hedge funds, mutual funds and endowments all over the world, which seek these financial securities because they pay very high interest rates.

In many ways, what the banks have created with leveraged loans to corporations resembles the old subprime mortgage business, which collapsed 10 years ago. The banks today don’t bother to check if the companies can pay back the leveraged loans before lending the money to these companies. That is because – just like 10 years ago – they don’t hold onto these corporate loans.

This has all the makings of another big disaster. There is a very good chance that most of the very indebted companies that have taken out even more loans will default when an economic downturn hits, rendering the financial instruments worthless. So what if the companies go bankrupt sometime in the future? The bankers and the big stockholders and owners already got their huge profits.

Some speculators are even betting on these companies’ collapse. They are buying a little of the debt of the risky companies at a discount, and then buying a much larger amount of insurance on that debt – so-called “credit default swaps.” These speculators do everything they can to force the company into a bankruptcy filing, which triggers the insurance payoff on the debt. Since the insurance payment exceeds by far the overall cost of the debt, the speculators plan on profiting handsomely, as well.

Of course, when companies go broke, it can cause tremendous damage, destroying jobs, incomes and entire communities. The damage from companies going broke can also spread quickly, with losses to investors, lenders and insurers piling up on each other, as weaker companies pull down seemingly stronger ones, given the huge amount of debt they are all in. If there are enough losses, it can set in motion another financial collapse on a global scale, just like the subprime mortgage crisis did 10 years ago.

Or it could even be worse. Since the U.S. government and Federal Reserve have pumped so much money into the pockets of the capitalist class over the last 10 years, they too are buried in record amounts of debt as well. Thus debt is building up on debt, in the private and public sectors, magnifying the dangers and risks to the entire economy and all the people in the world.