Economic Experts: Warren's Financial Crisis Warning Is Hyperbole

'In terms of imminent danger, debt levels appear manageable and manufacturing is still positive'

Sen. Elizabeth Warren / Getty Images
July 23, 2019

Economic experts are casting doubt on Sen. Elizabeth Warren's (D., Mass.) dire warning that a crash on the level of the 2008 financial crisis is on the horizon.

The 2020 Democratic hopeful penned a Medium post Monday arguing that rising household and corporate debt, as well as a "manufacturing recession," made the economy vulnerable to shocks that could bring about catastrophe. She called for stricter oversight of corporate lending, in addition to re-upping her policy proposals to lower household debt, which include a minimum wage hike and canceling most student debt. She has called for a $2 trillion investment in green research and manufacturing. financial editor Jeff Cox wrote Warren's missive "carried with it some level of hyperbole." Cox said her argument about consumer debt "neglects to measure it against the growth in the economy and the ability to pay," and she produced "scant evidence" of a manufacturing recession.

Household net worth stands at $108.6 trillion and household debt is at 14.4 percent of that figure at $15.7 trillion. That's a marked improvement on a decade ago in June 2009, Cox argues, when household net worth was $50.4 trillion and household debt totaled $13.8 trillion, equal to 27.4 percent of total net worth.

While he acknowledged student debt was high and non-financial corporate debt was 73 percent higher than since the end of the recession at $6.4 trillion, default rates are low.

"In terms of imminent danger, debt levels appear manageable and manufacturing is still positive—at least for now," he wrote.

Moody's Analytics director of real-time economics Ryan Sweet told the Washington Post that the manufacturing sector had been weak during the economic expansion before but it hadn't stopped growth.

"Manufacturing is important to the U.S. economy but it's not the U.S. economy," he said. "It makes up 8 to 10 percent of GDP, which is a pretty small share."

CNN business reporter Cristina Alesci also said Monday that Warren's invocation of corporate debt as a risk factor didn't hold up.

"While risky loans to corporations have increased post-financial crisis, the ability for those companies to keep up with payments has also increased, so we're not seeing the kind of default rates that would be alarming at this point," she said. "Now I'm not saying that's not a metric we should be paying attention to. All I'm saying is that Elizabeth Warren is shaping this conversation in a way that's politically convenient for her."

Alesci added that Warren's laundry list of proposed government programs could itself create a financial crisis, through the hiking of debt, taxes or both.

The Washington Post noted it wasn't "exactly good politics to cheerlead a recession" and Warren risked looking "badly misguided if the prediction goes bust." In the Finance 202 newsletter, Tory Newmyer writes:

JPMorgan and HSBC Asset Management economists, for example, both called recession fears exaggerated in recent reports. HSBC's global chief strategist said the United States isn't showing "large imbalances that could trigger a recession," adding with the Federal Reserve now taking a more accommodating stance toward monetary policy, growth should slow but won't drop below 2 percent.

Americans are in the best position to pay down their debt since the early 1990s, he wrote.

Sweet said the debt level made for "great headlines, but what's really important and what matters to the consumer are monthly debt payments."

Washington Examiner commentary writer Tiana Lowe wrote Warren correctly identified bubbles on the verge of bursting. Still, she took her to task for her government-centered solutions to the potential crisis.

"Warren's solution to the leveraged loan bubble, increased regulation, may be justified. And her plan to spend away to retain manufacturing jobs is fallacious, but it would probably simply do nothing," she wrote. "But to take a series of personal debt categories, and then nationalize them, risks creating a systemic bubble problem that could undermine the economy."