Private Credit Is Not 2008

Originally published on Substack. 

The latest panic over private credit is getting awfully familiar. A few funds hit redemption limits, some software-heavy loans wobble, and suddenly the political class and much of the media reach for the same tired script: shadow banking, hidden risk, time for Washington to step in.

Recent coverage has focused on investor withdrawals, pressure on software-related loans, and worries that private credit is having a “wake-up call.” But a wake-up call is not a funeral. Volatility is not the same thing as systemic collapse.

Markets Filling a Gap

Private credit did not appear out of nowhere. It grew because traditional banks pulled back from parts of the lending market, especially for middle-market firms that still needed capital but did not fit neatly into the old bank model.

A Federal Reserve note estimates U.S. private credit totaled about $1.34 trillion by mid-2024 and had grown roughly fivefold since 2009. That is not evidence of market failure. It is evidence that markets adapt when demand exists and legacy institutions cannot or will not meet it.

That is also why I agree with Steve Moore’s recent commentary. His point is straightforward: private credit can strengthen financial stability by diversifying lending away from government-backed banks and by allowing sophisticated private investors to fund projects directly rather than forcing more activity through taxpayer-exposed institutions.

He argues we need more of this financing, not less, especially if America wants to fund the industries of tomorrow without asking Washington to play venture capitalist. He is right.

Not a Replay of 2008

The 2008 financial crisis centered on a fragile banking system loaded with leverage, maturity mismatch, opaque securitization, and deposit-funded institutions vulnerable to panic.

Private credit is structured differently. In general, investors, not ordinary depositors, are taking the risk, and much of the funding is longer-term than the runnable liabilities that helped turn stress into crisis in 2008.

The Federal Reserve’s analysis says immediate financial-stability risks from private credit vehicles appear limited, in part because leverage is moderate and funding is more long-term. It also found that large U.S. banks appear sufficiently capitalized and liquid to absorb a significant drawdown scenario tied to private credit lines.

That does not mean there are no risks. It means the risks are different.

Liquidity Is Not a Scandal

What we are seeing now looks much more like a liquidity-design and valuation issue in certain semiliquid funds than a systemwide panic.

Reuters reported that Apollo Debt Solutions limited quarterly withdrawals to 5 percent after redemption requests reached 11.2 percent of shares. Reuters also noted that these vehicles typically disclose those redemption limits up front. Investors may not like that when markets sour, but disclosed liquidity terms are not a scandal. They are the contract. Illiquid assets are not supposed to behave like checking accounts with better branding.

That is where too many critics lose the plot. They see redemption caps and assume that government must ride in on a white horse. But if a fund misprices liquidity, let investors punish it. If managers overexpose themselves to a shaky sector, let returns suffer and capital leave. That is not market failure. That is the market doing its job.

Profit and Loss Still Matter

This is the part that defenders of regulation never seem to grasp. A market does not prove its worth by never making mistakes. A market proves its worth by revealing mistakes, pricing them, and reallocating capital away from bad decisions and toward better ones.

Prices move. Assets get marked down. Weak underwriting gets exposed. Managers who made bad bets get punished. Investors who ignored the fine print discover that they should not have. None of that requires a federal rescue squad. It requires adults taking responsibility for risk. That is what free markets demand.

And this is exactly why new taxes and regulations would be the wrong response.

Politicians love to take a contained market correction and convert it into an excuse for broader control. A few funds run into trouble, and suddenly the answer is more red tape for everyone. That would not make the market healthier. It would only reduce options, protect incumbents, and make capital formation harder for businesses that already struggle to find financing through traditional channels.

More Choice, Better Markets

Private credit serves a real economic purpose. It offers speed, flexibility, and customized financing for firms that are often too large or too specialized for community banks yet not natural fits for the broadly syndicated loan market. That broader menu of options matters.

A dynamic economy should not force every borrower into one approved lane any more than it should force every saver into one approved product.
This is not some moral defense of every lender or every loan. Some funds will do dumb things. Some managers will get punished. Some investors will find out the hard way that yield comes with risk. Good. That is how markets learn.

The real danger is not that private credit exists. The real danger is that Washington will use a messy but manageable period in one corner of the market as an excuse to shrink consumer and business choice across the board.

That would be backward.

Better Instinct

The instinct here should be that private credit fuel America’s future, not become the next excuse for bureaucratic mission creep. Diverse private financing can disperse risk more broadly and reduce dependence on the same government-backed banking model that critics claim to distrust.

If America wants to lead in the industries of tomorrow, startups and growth firms need access to capital, and the government should not be the one picking winners and losers.

Capital should come from investors willing to bear risk, not from bureaucrats pretending they can do venture allocation better than markets can.

The Bottom Line

Private credit is not 2008.

It is a market response to real demand. It is one more way businesses can get financed, investors can allocate capital, and markets can adapt when older institutions pull back. It deserves scrutiny, but not caricature. It deserves discipline through profit and loss, not panic-driven regulation or new taxes.

If private credit funds make bad decisions, let the market discipline them. If they make good decisions, let them grow. That is how a free economy works.

And yes, that means letting markets get messy sometimes. I trust that process a lot more than I trust Washington chasing headlines.

Three Takeaways for Policymakers

1. Protect choice in credit markets.

More financing options for businesses and investors make the economy more resilient, not less.

2. Let profit and loss do the disciplining.

Bad underwriting, poor liquidity design, and weak sector bets should be punished by markets, not socialized by government.

3. Do not confuse volatility with systemic collapse.
​
Redemption limits and repricing in semiliquid funds are not the same thing as a 2008-style banking panic.