Your Humble Blogger doesn’t know anything about economics, really. I don’t understand macro- or micro-, and I don’t know what else I don’t understand, either. I don’t know anything about banking or financial services. And I don’t, honestly, want to learn very much about either of those things. Learning about them seems dreary and unproductive, and probably everything I would learn would be wrong again within a few years. Sigh.
Anyway, what with not knowing anything about banking and economics, I am sometimes perplexed by news items like this one, which reports that the former Clear Channel corporation that owns 850 radio stations has gone bankrupt, and will not be paying off ten billion dollars of its twenty billion dollar debt. This of course comes on the heels of a different ownder of 450 radio stations going bankrupt last fall; they will not pay a billion out of their two billion dollar debt. Toys R Us, of course, will not be repaying some five billion or more.
So, again, I don’t know anything about economics or banking, but that seems like a lot of money for whoever is lending it to not get back. I would think that if that sort of thing happens a lot, as it seems to do, that it would have a really unfortunate effect on the entire national economy.
Look, humans (including me) are terrible at scale, so let me attempt to talk this through. Think about mortgages—it seems that the mortgage default spike in 2008-209 caused real damage throughout the economy, and rattled the entire financial system. Yes? I don’t know how much was unpaid out of a typical default for a mortgage, but let’s call it, oh, $150,000? That’s three-quarters of the median price for a new house. I mean, the average could be a bit more than that, or a lot less, I dunno. But if we take that fairly random number and think about the spike up to three million foreclosures—that’s, er, a thousand million is a billion in this country, so that’s four hundred and fifty billion dollars in default. That’s a lot of money. That is, in fact, a colossal fuckload of money. Wow. I don’t know if it’s close to the real number; I would believe anything from a hundred billion to, oh, six hundred billion. A lot of money.
On the other hand, the Clear Channel default is one company and ten billion dollars and there are a lot of corporate bankruptcies.
And, yeah, the people who aren’t getting their debt repaid are getting equity in the company, but then the banks got equity in the foreclosed houses, so. And the lenders in the Clear Channel business aren’t directly banks, as such, it seems. And the odds of default are priced in to the interest rates and so forth in very different ways. And there are probably other reasons the two kinds of things aren’t really comparable, even if they are both about money being borrowed that can’t be repaid. Like I said, I don’t really know anything about economics.
Still and all, I do worry that there are more crashes coming. There’s a line sometimes attributed to Alex Pollack that goes something like Debts that cannot be paid won’t be. There’s a lot of debt in this country (I see there is something like a trillion dollars in credit card debt in this country, of which I cannot believe that anything like half will ever be paid) and we seem to putter along pretty well, so maybe these massive corporate bankruptcies are not just an ordinary part of corporate capitalism (with all that entails) and are not a danger to the system. I don’t understand how that could be the case, but then, as I keep saying, there’s so much I don’t understand.
Tolerabimus quod tolerare debemus,
-Vardibidian.
An important factor that I, in my economic ignorance, assume is important in gauging the impact of bankruptcies on the market is whether the risk on the debt was priced appropriately. One major reason that the subprime mortgage crisis hit so hard was because, due to a variety of factors (among which incompetence and fraud both loom large), the risk levels for investment instruments that included lots of subprime mortgage debt were badly mis-assessed, so that entities that had invested in those instruments were much more badly exposed to loss than they should have been, which contributed to the cascade of failures when the housing bubble burst.
My general sense is that the economy is more vulnerable to a downturn now than it has been for some time, and it has been given a solid push in that direction by the stupid, venal Republican tax cut. However, the checks on risk-taking by banks put in place by Dodd-Frank and not yet removed by the stupid, venal Republican Congress are a much better protection against cascading bank failures than what was in place in 2008.
It looks, then, like there is danger of recession in the next year or two, but not of system collapse, as there was in 2008. Of course, the fact that the Federal Government has the worst possible leadership in place needs to be factored into our risk assessment. If there were an economic downturn on their watch, their response would almost certainly worsen it significantly. I can’t guess how great an impact the mismanagement of the economy by the Donald Trump/Larry Kudlow/etc. team would be on a downturn, but it would have to be substantial.