Market crashes, zombie stocks & a $2 trillion Senate bailout vs. “We the People”
The biggest market weakness I found during my research was a massive pile of corporate debt. Which is the primary reason why stocks fell so hard and so fast. Large US companies owe their creditors $10 trillion — one-half of GDP. Overall business debt-load is $15.7 trillion when you add small, medium and family businesses. Much of this debit — $2.2 trillion worth — is highly leveraged according to the Bank of England. That’s comparable to the highly leveraged CDO debt (collaterized debt obligation) that sank the housing market in 2005. Even worse, corporations around the world are up to their eye-balls in debt as well — $127 trillion of according to this 2019 report by the Institute of International Finance. Total world debt load including consumer and government debt, as well as corporate debt, is $253 trillion.
Even before coronavirus, even before the crash, a shockingly large number — over 20% — of U.S. companies were zombie firms, meaning current earnings are not enough to cover interest payments.
So back to the problem, what is it?
If this market was headed for disaster before coronavirus, doesn’t that change what we should be doing? If 20% of our companies are zombies, can they even be saved? Should they be saved? And if saving jobs is the goal, isn’t bankruptcy law a better route for an over-indebted company?
Catherine Rampell argues forcefully in the Washington Post that the Senate is making a mistake in throwing $50 billion at the airline industry.