The economy and asset prices have proved more resilient than feared
economist Paul Samuelson once quipped, have predicted nine out of the last five recessions. Today they stand accused of crying wolf yet again. Pessimism seized trading floors around the world in 2022, as asset prices plunged, consumers howled and recessions seemed all but inevitable. Yet so faris the only big economy to have actually experienced one—and a mild one at that.
Since the start of 2022, the average interest rate on an index of the riskiest debt owed by American firms has risen from 4.4% to 8.1%. Few, though, have gone broke. The default rate for high-yield borrowers has risen over the past 12 months, but only to around 3%. That is much lower than in previous times of stress. After the global financial crisis of 2007-09, for instance, the default rate rose above 14%.
Yet this happy outcome was far from costless. America’s bank failures were stemmed by a vast, improvised bail-out package from the Fed. One implication is that even mid-sized lenders are now deemed “too big to fail”. This could encourage such banks to indulge in reckless risk-taking, under the assumption that the central bank will patch them up if it goes wrong.
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