The International Monetary Fund (IMF) has similarly highlighted this threat, warning that riskier lending behavior could lead to another crash.
“A period of high credit growth is more likely to be followed by a severe downturn or financial sector stress over the medium term if it is accompanied by an increase in the riskiness of credit allocation,” the IMF said in its Global Financial Stability Report in April.
Global debt, meanwhile, is a record $247 trillion — that’s 318 percent debt to gross domestic product, far above the level in 2007 and 2008, the Institute of International Finance (IIF) reported in July.
This could spell trouble as interest rates rise, particularly if they trigger a pullback in equities — something that is inevitable, Blitz warned. And with banks now taking less risks than they did a decade ago due to post-crisis regulations, the liquidity in the market is gone, he added. So the question is, when everyone starts selling, who’s on the buy side?
In fixed income markets, it’s the Fed. Asked if the Fed could step in to buy equities during a crisis, Blitz replied, “you’d hate to see that happen.” This is because it would present what the economist called a “moral hazard.”
“The more the government is involved in markets and market making, you always raise the issue of moral hazard because then people will take more risk believing they’ll always get bailed out.”
Other analysts say that the red flags aren’t appearing yet, mostly thanks to low interest rates and high economic growth, and the fact that it’s the well-capitalized, large-cap companies that mainly drive equities. Still, as quantitative tightening progresses and other potential selloff triggers loom on the horizon, like emerging market worries and trade war fears, these unprecedented debt levels may look more vulnerable than ever — begging the question of how much we’ve really learned in the past ten years.