Sen. Elizabeth Warren, a Massachusetts senator, warns that risks are growing in the economy and the financial market.
The Democratic presidential candidate in a blog dated July 22 on Medium, pointed to a trio of factors that could cause an ”economic crash.”
As Warren describes it, those risk factors include, mounting household debt, with student loan debt more than doubling since the 2008 financial crisis (New York Times paywall), and a recession in manufacturing, which many industry officials have said has been exacerbated by the China-U.S. trade war that has lasted more than year and has been a key catalyst in the Federal Reserve’s inclination to reduce corporate borrowing costs at the conclusion of its two-day policy gathering on July 31.
The 70-year-old lawmaker—credited with helping to create the Consumer Financial Protection Bureau, an agency at least partly formed to protect average folk against predatory-lending practices-— also called out problems brewing in corporate debt, specifically in the area of leveraged loans.
Read: Here’s who keeps investors abreast of this opaque debt market and possible systemic risk
Financial regulators have been persistently raising red flags about the growth of leveraged lending, debt usually made to already deeply indebted companies, and the deteriorating quality of such loans.
Warren described the debt this way in her Medium blog: “These high-risk loans now make up a quarter of all American business loans, and they look a lot like the pre-2008 subprime mortgages: poorly-underwritten loans with minimal protections that are then packaged and sold to investors.”
To be sure, she isn’t the only one ringing alarm bells over leveraged loans, financial watchdogs say the deterioration in covenants required by lenders tied to those loans could result in steep losses for investors during an economic downturn and potentially lead to instability in the U.S. financial system, notes research company Covenant Review.
The boom in leveraged loans has come amid ultralow and negative yielding debt across the globe that has fostered an insatiable appetite for richer returns, pushing investors to areas of the market that are perceived as risky. Some $13 trillion in government debt now yields less than zero, which means that lenders get less than their original investments when providing such debt to borrowers.
That dynamic has also driven investors to U.S. Treasurys, keeping benchmark yields, which fall when prices rise, unnaturally low. the 10-year Treasury note’s rate stands at 2.04% on Monday, even as the Dow Jones Industrial Average DJIA, -0.09% the S&P 500 index SPX, +0.11% and the Nasdaq Composite Index COMP, +0.50% have been trading near records, with all three putting in all-time highs as recently as last week.
Warren has been ratcheting up her comments on markets and the economy, which President Donald Trump has called out as a key victory of his time in the Oval Office. Trump, who considers himself a successful businessman with a knack for striking good deals, has hitched his success to the health of the economy and a powerful rally in stocks in the aftermath of his stunning 2016 election victory gains then-candidate Hillary Clinton.
Warren last week unveiled a proposal for new rules on private-equity firms, likening companies to vampires.
The senator’s comments come roughly a week before the next round of Democratic presidential debates, scheduled for July 30 and 31 in Detroit. Warren places third in the RealClearPolitics average of polls, behind only former Vice President Joe Biden and Vermont Sen. Bernie Sanders.