Thread by @padresj

I'm going on a financial rant.
Fair warning to those who don't want more bad news about the economy.

...

There is no question that COVID-19 is wreaking havoc on the global economy, and the US in particular, but the truth is that the foundation for the meltdown started in 2017.

In Feb 2017, Trump said,

“We expect to be cutting a lot out of Dodd-Frank b/c, frankly, I have so many people, friends of mine, who have nice businesses who can’t borrow money. They just can’t get any money b/c the banks just won’t let them borrow.”

thehill.com/policy/finance…

The specific reason WHY those banks wouldn't let Trump's friends borrow money was b/c of the Dodd-Frank regulations against loaning money to companies that were already heavy in debt.

The idea was simple:
Force companies to act responsibly by not allowing them to over-leverage.

Fast-forward to May 2018:

Trump signs a bill, fast tracked through the still @GOP-controlled House and Senate, that allows banks to make riskier short-term bets.

politico.com/story/2018/05/…

Along with that, Trump makes good on his promise to make it easier for his friends to take loans by eliminating the regulations that prevented them from over-leveraging.

Corporate debt starts to grow. Quickly.

... but the economy continues to grow with it.

Jump again to March 2019:

The Trump admin relaxes oversight on financial institutions and gives banks a free pass on even riskier bets while also decreasing the percentage of capital banks needed on-hand to cover those bets.

https://twitter.com/padresj/status/1103660428117397505?s=20

This means three things:

1. Companies that SHOULDN'T be borrowing more money (b/c they can't service the debt if profits don't keep rising) ARE.

2. Banks that SHOULDN'T be taking those bets b/c they're too risky, ARE.

3. Nobody is watching b/c of reduced oversight.

Many sounded the alarm about how dangerous this was (like pulling all the control rods out of a stalled reactor) but the rollbacks allow the economy to continue to grow at a record pace.

As long as it CONTINUES to grow, the accumulating debt won't be a problem.

Jump to 2020:

Corporate debt passes consumer debt.

Companies are close to defaulting on bond payments (servicing their debt)
- which would lower their rating
- which would lower the price of the bonds
- which would make it more difficult to sell new bonds
- which means default

Still, as long as the market continue to rise, those corporations can:

- make their bond payments
- get capital to continue expanding
- which increases their revenue
- which increases their profits
- which drives the market higher

... Then COVID-19 shattered that cycle

Because of all the regulation rollbacks, not only are corporations FAR more in debt than they should be, but there are also precious few things that can be done to stop them from defaulting.

There are no safeties left except for the largest corporate bailout in history.

Unfortunately this only delays the defaults.

When COVID-19 runs its course, those payments will still be there and the market will most likely not be able to support new bonds to service debt.

In fact, if this pandemic is anything but a short affair, the pain has just started.

Now... those regulations are still rolled back. All the conditions to continue this financial game of chicken are still in place even if the market miraculously survives.

What WE need to do is elect reps who won't boost their short-term numbers with a proven recipe for disaster.