A decade ago this week, Wall Street imploded.
The global financial crisis is fading into history. But the roots of the next one might already be taking hold.
Financial crises strike rich countries every 28 years on average. Often, the break between busts is much shorter.
Fast-growing pockets of debt, as in the last time around, look like potential sources of problems. They’re nowhere near as big as the mortgage bubble, and no blow-ups appear imminent.
“But what we saw last time around is that things can creep up on you,” said Wesley Phoa, a bond-fund manager at the Capital Group. “You can turn around and in three years’ time you can go from not much of a problem to a pretty big problem.”
The amount of American student debt — roughly $1.5 trillion — has more than doubled since the financial crisis. It is now the second-largest category of consumer debt outstanding, after mortgages.
Public colleges and universities, hurt by state budget cuts, increased tuition. The drop in house values also made it harder for families to tap into their home equity to pay for tuition. As a result, the financial burden shifted to students, who took on heavier debt loads to pay for school.
Many borrowers are already falling behind. During the second quarter of 2018, more than 10 percent of student loans were at least 90 days past due. That was down slightly from a couple of years ago, but higher than the peak for mortgage delinquencies during the last crisis.
Could this spark a new crisis, with student loans playing the role that mortgages played a decade ago? Probably not.
The student loan market is much smaller than the mortgage market. And the main lender is the federal government, so even a surge of defaults would barely touch the banking system, unlike the mortgage meltdown.
The bigger issue is whether growing amounts of student debt may be a drag on consumers. Some think it could be playing a role in the decline of homeownership over the last decade, an important driver of spending in the consumption-led American economy.
Companies are also loading up on debt
After the crisis, central banks slashed their interest rates. Investors moved their money out of government bonds, which were paying essentially nothing. And they piled into corporate bonds, which typically pay slightly higher rates.
American companies were more than happy to satisfy investors’ ravenous appetites — and they did so by selling gobs of debt.
There are signs that the borrowing binge may have gone too far. Debt issued by non-financial companies is near its highest levels, as a share of the United States economy, since World War II. In the past, such indebtedness has been followed by a rise in defaults.
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