MNI INTERVIEW: US Financial Stability Risks Mounting-Ghamami

Risks to the U.S. financial system are high and rising as the Iran energy shock exposes vulnerabilities like unprecedented growth in private credit and an increasingly debt-fueled boom in AI, former Fed and Treasury economist Samim Ghamami told MNI. 

“The combination of all these factors would tell me that the level of risk in the financial system in the U.S. and globally is high currently,” said Ghamami, who worked in the Treasury's Office of Financial Research, created after the Global Financial Crisis to monitor threats to stability. 

He noted that the Iran war has already been going on for longer than most policymakers had originally hoped, which is leading to a weaker outlook for growth, the prospect of significantly higher inflation and increasingly unsustainable debt loads reflected in higher bond yields. (See MNI INTERVIEW: Fed Can't Ignore Mounting Price Pressures-Liang)

“The distress in private credit markets, mostly in BDCs, earlier this year was largely due to a slack software sector and largely driven by the huge AI investments that we have been observing in the past few years,” said Ghamami, who is now chief economist at the New York State Insurance Fund, in an interview. He noted these are his personal views and do not reflect those of the New York State Insurance Fund, the government of the State of New York or any New York State government agency.

“I'm also worried about the potential burst in the stock market because of the AI world, mostly because until the recent past investment in AI was essentially through cash flows, meaning equity as opposed to debt financing, but it is well known that it has now turned into debt financing, and in some parts of the AI value chain, for example data centers, to CMBS as well,” he said. “Part of that recent development in debt financing has been fueled by private credit.”

Ghamami acknowledged that the size of the private credit market is still fairly small for it to be a systemic concern – only around USD1.4 trillion, about 10% of outstanding non-financial U.S. corporate debt. But he also worries that in a financial system that according to his research is now more interconnected than before the GFC, even smaller markets can have considerable ripple effects. 

“In the presence of these vulnerabilities everything could be propagated and amplified through the financial system and that could lead to a financial crisis,” he said. 

Concerns about private credit mounted this year when a handful of bankruptcies in the sector spilled over into losses for traditional banks. 

“Policymakers, regulators would need to find ways to measure and monitor financial stability risks that could arise because of this unprecedented growth in private credit markets,” said Ghamami.