In January of 2019, Mark Carney, the governor of the Bank of England, appeared before a House of Commons committee to discuss global threats to financial stability. At that time, the U.S. unemployment rate was below four per cent, the gross domestic product was growing steadily, and Donald Trump was busy boasting about “the greatest economy ever.” But, despite these favorable statistics, staffers at the bank had identified a potentially serious problem on the horizon: a rapid buildup of corporate debt, which was associated with a potentially alarming decline in lending standards. Carney compared what was happening in the corporate-debt markets to the subprime-mortgage boom that culminated in the great financial crisis of 2008 and 2009. Citing the rise of “covenant lite” loans that placed very few restrictions on corporate borrowers, Carney said, “The subprime analogy isn’t perfect, but it’s on the road to ‘no doc’ underwriting, which happened eleven years ago.”
Carney’s warning didn’t make a big splash in this country. On Wall Street, it was widely acknowledged that there had been some excesses in the corporate-debt market, and that credit standards had slipped. Decades ago, blue-chip corporations jealously guarded their top-notch credit ratings: they were wary of issuing too much debt. But, in a new era of finance-driven capitalism, companies like American Airlines, Hertz, and Staples borrowed heavily to finance acquisitions, stock buybacks, and, in some cases, leverage buyouts sponsored by private-equity companies. Between the fourth quarter of 2009 and the fourth quarter of 2019, the total debt of non-financial corporations rose from $6.1 trillion to $10.1 trillion, according to figures from the Federal Reserve Board.
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