Donald Trump wants average Americans to start investing in private credit. A couple of weeks ago, the president cleared away legal barriers to employers that want to let workers put their 401(k)-retirement money into riskier but potentially higher-yielding assets like private equity, real estate funds and so on. Big institutions and rich people do it, he says, so why shouldn’t everyone else?
I would argue that the government shouldn’t be encouraging average Americans to go into such alternative investments right now because we are likely entering the very tail-end of a risky credit cycle that could blow up. This isn’t a radical statement. It has become widely understood that, following the global financial crisis of 2008, risk moved from the formal banking sector into the private credit market. But to understand why this moment is so very delicate, it helps to go back further in history for lessons, to the junk bond crisis of 1989-90.
Former Biden administration Securities and Exchange Commission chair Gary Gensler, now a professor at MIT who teaches among other courses “Disrupting Wholesale Finance”, explains it thus.