You definitely have enough to worry about right now, but both problems are a result of an unwillingness on the part of Republicans to engage in research, planning and coordination, and to admit that government has an essential role to play in those activities and in regulating financial markets.
“But given the existing cost and availability of credit within the traditional system, I don’t see the need for unregulated private credit as significant enough to offset the risks it engenders, risks that are starting to surface.”
How much of the whole asset management system is useful? Mariana Mazzucato says in her book The Value of Everything that “only 15% of the funds generated go to businesses in non-financial industries. The rest is traded between financial institutions, making money simply from money, changing hands, a phenomenon that has developed hugely, giving rise to what Hyman Minsky called money manager, capitalism. Or, put another way: when finance makes money by serving not the real economy, but itself. “
The thing that really worries me is that if you only have one viable party that is willing to govern responsibly, and the other just tears everything apart if they gain power, how can you have a functioning democracy?
She goes on to say in a section called Prometheus (with a pilots license) Unbound, “Winston Churchill, then Chancellor of the Exchequer, had begun to get itchy about the way in which finance was changing. He famously claimed that he would rather see finance less proud and industry more content. The suspicion troubling policy makers.(and their newly emerging economic advisors) was that financiers were positioned in relation to industrial producers in the same way as pre-industrial land owners related to agricultural producers, extracting a significant share of the revenue, without playing any active part in the process of production. “
So, we effectively repealed the Glass-Steagall Act in 1999. We had a predictable financial crisis that metastasized into a global, deep recession in 2008-09. Now, we have so much income and wealth inequality that substantial proportions of global credit are being put at extraordinary risk. But wait, there’s more. We have sunk so much money into AI that we are now worried that its bubble will burst. Just another variation on extraordinary risk. We keep failing the Stanford Marshmallow Test.
The problem is that the rest of us pay the penalty. And have to keep paying.
We just have to make sure to tell our representatives: no bailouts (welfare capitalism) of private credit. Forgetting what capitalism means, these greedy folks always come with their hands out when their crap fails while keeping all their massive profits during unregulated good times. Remember the GOP cares only for the oligarchs: fiduciary rules put in place by Presidents Obama & Biden to protect consumers were cancelled by the GOP’s dear leader. Senator Warren’s wonderful CFPB is being gutted by the GOP. No more welfare wallstreet bailouts. With internal attacks and an unprovoked, evil war with Iran, the GOP’s unrestrained dear leader is making the US uninvestable.
Another element to consider is the (regulated) banking industry's credit exposure to the private credit industry. The banks have determined that the private credit debtors are not bankable so we'll lend to the private credit industry instead. Classic banking.
As an amateur economist, I would like to address an issue I feel is generally overlooked: human psychology. When not if, some of these private credit funds fail, it will probably be during a general economic downturn. I can see the fear spreading to other areas, such as the subprime mortgage markets and subprime car loans, both of which will have increasing default rates as people lose their jobs, etc. Added to this are declining cryptocurrency prices, which the clown show in Washington will have allowed to be included in people's 401(k) s. Billionaires and a possible trillionaire have control of our government, and they have greatly reduced all forms of oversight in financial markets. This contagion could be well underway before anyone realizes the full consequences of a run on credit during an economic contraction. Our national debt is approximately 39 trillion dollars, Treasury bond sales are showing signs of stress, and the full costs of the war in Iran have yet to be accounted for. The light at the end of the tunnel is probably a train coming straight at us.
Since I know nothing about this (and read Mr Bernstein so I can pretend to be coherent) I have to ask "Why not bonds?" Isn't that how lending outside of banking is supposed to happen?
To chime in on your final musing, yes the War is looking to lead to $150 Brent crude (see Krugman's latest), with fertilizer and helium kneecapped, and oh some fresh jobs report this Friday, all after the close of the Q1 2026...
Storms are brewing and the Private Credit canary is in the coal mine...
Here is my concern. Correlation. If the AI bubble bursts and private credit retrenches, and investors fly out of crypto because it’s speculative and they need cash they can’t get from redemption restricted private credit…. Does it all self-reinforce and magnify and we have a large correction?
One last thing, Mariana Mazzucato puts how we think about the financial markets in terms of a story about how we value things. We need to be able to communicate stories that people can understand and relate to. Insurance is one good story that people understand, but value is another.
“Strange as it might seem now, policy makers largely ignored the danger of financial turmoil. Only a few years after his 2004 Mansion House speech, in which he paid fulsome tribute to the productivity of the city of London’s financial and business, elite, then Labour Chancellor of the Exchequer Gordon Brown voiced the hubris, which financiers, regulators, politicians, and many economists shared when the economy was still apparently robust. In his 2007 budget statement, months before the first signs of the coming crash appeared on the horizon, Brown solemnly declared (not for the first time): “ We will not return to the old boom and bust.”
How could Brown and so many others have got it so horribly wrong? The key to this catastrophic misjudgement lies in their losing sight of one crucial factor: the distinction between price and value, which over the previous decades had been lost from sight. The marginalist revolution that had changed the centuries old theory of value to one of price had exposed marginal ultimate ism’s ultimate tautology : finance is valuable because it is valued, and it’s extra extraordinary profits are proof of that value.
So when the global financial crisis arrived in 2007, it blew apart the ideology that had promoted financialization above all else. Yet the crisis did not fundamentally change how the sector is valued: two years later, the head of Goldman Sachs could still keep a straight face when arguing that his bankers were the most productive in the world. And the fact that ex Goldman Sachs employees were abundant in both the Obama and Trump administrations shows the power of the story of the “value”created by Goldman Sachs across political parties.”
Your post today reminded me of my banking days. Back in my Corporate/Business lending days for a National Banking Organization, we had several rules of lending we tried to always keep in mind when evaluating lending opportunities, two (2) of which were as follows:
1. The area of your lending portfolio growing the fastest will be the next problem area.
Based upon the data in the chart included in your post, I have expected private credit to be this next problem area since 2020 - am frankly surprised it has made it this long before starting to spook the markets.
2. You can never price enough to offset (the real downside) risk. A very small loss wipes out any profit made on the interest rate spread (rate/fees paid by the borrower less the rate/fees of cost for the lender) - the rate does not offset the cost of the loss of any of the principal.
Nothing about rate offsets or reduces the risk of these loans.
There will be some big losses in the private credit area - the question for me is whether they will be so big as to freeze the market for private credit loans, or whether the market adjusts appropriately for the challenges identified in the failed transactions, and tightens their standards in such a way to allow private credit to continue with less risk exposure to the market.
There’s something eerily familiar in the way this is unfolding. Not panic, not yet—but that quiet shift where everyone starts asking the same question at the same time. And by then, as Bernstein hints, they already know the answer.
Private credit feels like one of those structures built in the late innings of a long expansion—useful, profitable, and just opaque enough to keep the crowd comfortable. Until it isn’t. The danger isn’t the size today, it’s the pathway it’s carving through the system, the way risk migrates into corners no one is actively watching. These things rarely break because they are large. They break because they are misunderstood.
Layer that on top of rising energy costs and a world trading headlines instead of facts, and you start to see the shape of it. Not a single catalyst, but a convergence—where stress builds in different places, quietly, until the market is forced to recognize it all at once.
As a proponent of the <indigenous-sovereignty> Forests Carbon Bank as a financial base for the long-time-a'coming and way overdue carbon economy, reminders of instability around financial innovation are always timely.
Collateralized carbon obligations anybody? Yikes! I love being out over my skis, but that is one bodacious couloir there!
This post was written with excellent clarity.
You definitely have enough to worry about right now, but both problems are a result of an unwillingness on the part of Republicans to engage in research, planning and coordination, and to admit that government has an essential role to play in those activities and in regulating financial markets.
“But given the existing cost and availability of credit within the traditional system, I don’t see the need for unregulated private credit as significant enough to offset the risks it engenders, risks that are starting to surface.”
How much of the whole asset management system is useful? Mariana Mazzucato says in her book The Value of Everything that “only 15% of the funds generated go to businesses in non-financial industries. The rest is traded between financial institutions, making money simply from money, changing hands, a phenomenon that has developed hugely, giving rise to what Hyman Minsky called money manager, capitalism. Or, put another way: when finance makes money by serving not the real economy, but itself. “
The thing that really worries me is that if you only have one viable party that is willing to govern responsibly, and the other just tears everything apart if they gain power, how can you have a functioning democracy?
She goes on to say in a section called Prometheus (with a pilots license) Unbound, “Winston Churchill, then Chancellor of the Exchequer, had begun to get itchy about the way in which finance was changing. He famously claimed that he would rather see finance less proud and industry more content. The suspicion troubling policy makers.(and their newly emerging economic advisors) was that financiers were positioned in relation to industrial producers in the same way as pre-industrial land owners related to agricultural producers, extracting a significant share of the revenue, without playing any active part in the process of production. “
So, we effectively repealed the Glass-Steagall Act in 1999. We had a predictable financial crisis that metastasized into a global, deep recession in 2008-09. Now, we have so much income and wealth inequality that substantial proportions of global credit are being put at extraordinary risk. But wait, there’s more. We have sunk so much money into AI that we are now worried that its bubble will burst. Just another variation on extraordinary risk. We keep failing the Stanford Marshmallow Test.
The problem is that the rest of us pay the penalty. And have to keep paying.
We just have to make sure to tell our representatives: no bailouts (welfare capitalism) of private credit. Forgetting what capitalism means, these greedy folks always come with their hands out when their crap fails while keeping all their massive profits during unregulated good times. Remember the GOP cares only for the oligarchs: fiduciary rules put in place by Presidents Obama & Biden to protect consumers were cancelled by the GOP’s dear leader. Senator Warren’s wonderful CFPB is being gutted by the GOP. No more welfare wallstreet bailouts. With internal attacks and an unprovoked, evil war with Iran, the GOP’s unrestrained dear leader is making the US uninvestable.
Another element to consider is the (regulated) banking industry's credit exposure to the private credit industry. The banks have determined that the private credit debtors are not bankable so we'll lend to the private credit industry instead. Classic banking.
As an amateur economist, I would like to address an issue I feel is generally overlooked: human psychology. When not if, some of these private credit funds fail, it will probably be during a general economic downturn. I can see the fear spreading to other areas, such as the subprime mortgage markets and subprime car loans, both of which will have increasing default rates as people lose their jobs, etc. Added to this are declining cryptocurrency prices, which the clown show in Washington will have allowed to be included in people's 401(k) s. Billionaires and a possible trillionaire have control of our government, and they have greatly reduced all forms of oversight in financial markets. This contagion could be well underway before anyone realizes the full consequences of a run on credit during an economic contraction. Our national debt is approximately 39 trillion dollars, Treasury bond sales are showing signs of stress, and the full costs of the war in Iran have yet to be accounted for. The light at the end of the tunnel is probably a train coming straight at us.
Clearly showing Capitalism’s endless
struggle to sow the seeds of middle class destruction.
Since I know nothing about this (and read Mr Bernstein so I can pretend to be coherent) I have to ask "Why not bonds?" Isn't that how lending outside of banking is supposed to happen?
Informative and timely post - Thank You!
To chime in on your final musing, yes the War is looking to lead to $150 Brent crude (see Krugman's latest), with fertilizer and helium kneecapped, and oh some fresh jobs report this Friday, all after the close of the Q1 2026...
Storms are brewing and the Private Credit canary is in the coal mine...
Here is my concern. Correlation. If the AI bubble bursts and private credit retrenches, and investors fly out of crypto because it’s speculative and they need cash they can’t get from redemption restricted private credit…. Does it all self-reinforce and magnify and we have a large correction?
One last thing, Mariana Mazzucato puts how we think about the financial markets in terms of a story about how we value things. We need to be able to communicate stories that people can understand and relate to. Insurance is one good story that people understand, but value is another.
“Strange as it might seem now, policy makers largely ignored the danger of financial turmoil. Only a few years after his 2004 Mansion House speech, in which he paid fulsome tribute to the productivity of the city of London’s financial and business, elite, then Labour Chancellor of the Exchequer Gordon Brown voiced the hubris, which financiers, regulators, politicians, and many economists shared when the economy was still apparently robust. In his 2007 budget statement, months before the first signs of the coming crash appeared on the horizon, Brown solemnly declared (not for the first time): “ We will not return to the old boom and bust.”
How could Brown and so many others have got it so horribly wrong? The key to this catastrophic misjudgement lies in their losing sight of one crucial factor: the distinction between price and value, which over the previous decades had been lost from sight. The marginalist revolution that had changed the centuries old theory of value to one of price had exposed marginal ultimate ism’s ultimate tautology : finance is valuable because it is valued, and it’s extra extraordinary profits are proof of that value.
So when the global financial crisis arrived in 2007, it blew apart the ideology that had promoted financialization above all else. Yet the crisis did not fundamentally change how the sector is valued: two years later, the head of Goldman Sachs could still keep a straight face when arguing that his bankers were the most productive in the world. And the fact that ex Goldman Sachs employees were abundant in both the Obama and Trump administrations shows the power of the story of the “value”created by Goldman Sachs across political parties.”
Fini
Jared
Your post today reminded me of my banking days. Back in my Corporate/Business lending days for a National Banking Organization, we had several rules of lending we tried to always keep in mind when evaluating lending opportunities, two (2) of which were as follows:
1. The area of your lending portfolio growing the fastest will be the next problem area.
Based upon the data in the chart included in your post, I have expected private credit to be this next problem area since 2020 - am frankly surprised it has made it this long before starting to spook the markets.
2. You can never price enough to offset (the real downside) risk. A very small loss wipes out any profit made on the interest rate spread (rate/fees paid by the borrower less the rate/fees of cost for the lender) - the rate does not offset the cost of the loss of any of the principal.
Nothing about rate offsets or reduces the risk of these loans.
There will be some big losses in the private credit area - the question for me is whether they will be so big as to freeze the market for private credit loans, or whether the market adjusts appropriately for the challenges identified in the failed transactions, and tightens their standards in such a way to allow private credit to continue with less risk exposure to the market.
Lack of traditional reserve requirements for private credit (equity, liquidity) is also concerning.
There’s something eerily familiar in the way this is unfolding. Not panic, not yet—but that quiet shift where everyone starts asking the same question at the same time. And by then, as Bernstein hints, they already know the answer.
Private credit feels like one of those structures built in the late innings of a long expansion—useful, profitable, and just opaque enough to keep the crowd comfortable. Until it isn’t. The danger isn’t the size today, it’s the pathway it’s carving through the system, the way risk migrates into corners no one is actively watching. These things rarely break because they are large. They break because they are misunderstood.
Layer that on top of rising energy costs and a world trading headlines instead of facts, and you start to see the shape of it. Not a single catalyst, but a convergence—where stress builds in different places, quietly, until the market is forced to recognize it all at once.
" .... Trump goes from de-escalation to escalation in the same sentence—so we’re flying blind here (here’s today’s latest on that)."
I think the Trump put at $4.02 a gallon is right. He is feeling it in his eighty-year-old arthritic bones.
As a proponent of the <indigenous-sovereignty> Forests Carbon Bank as a financial base for the long-time-a'coming and way overdue carbon economy, reminders of instability around financial innovation are always timely.
Collateralized carbon obligations anybody? Yikes! I love being out over my skis, but that is one bodacious couloir there!