Private Credit Panic Says More About Washington Than Finance

Originally published at RealClear Markets. 

​The latest panic over private credit says more about Washington than it does about finance.

A few major funds have limited withdrawals. Some software-heavy loans are under pressure. Critics are reviving the old script about “shadow banking” and fresh bailout chatter, while others warn that private assets are creeping into retirement accounts with risks many investors may not fully understand. 

Those concerns are worth taking seriously. But they still skip the real problem: government helped create this structure in the first place, and more government control would likely make it worse.

Private credit did not come out of nowhere. It grew because traditional banks pulled back from large parts of the lending market after 2008, especially for middle-market firms that still needed capital but no longer fit neatly inside the post-crisis banking model. 

The Federal Reserve estimates that 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 real demand exists and older institutions cannot or will not meet it.

A big reason banks pulled back was the government response to the last crisis. Dodd-Frank was sold as a cure for instability. In reality, it also increased compliance costs, hardened barriers to entry, and reinforced the advantage of the biggest incumbents. 

Add years of Federal Reserve intervention and distorted price signals, and it is no surprise that capital looked for other channels. That is what markets do when the government makes banking less competitive and more political.

Recent reporting has highlighted withdrawal caps at private equity funds run by Apollo, Ares, KKR, and Blue Owl. There are also rising warnings about software exposure, softer valuations, and higher defaults. 

Watch it closely. But watching closely is not the same thing as pretending this is another 2008.

That comparison is lazy. The 2008 crisis ran through deposit-funded banks, extreme leverage, maturity mismatch, and securities that transmitted panic across the broader system. 

The Office of Financial Research has said vulnerabilities tied to private credit appear low because private lenders are not highly leveraged and much of their financing is locked in for long periods. 

The Federal Reserve has likewise noted that immediate financial-stability risks appear limited.  Chairman Jerome Powell has indicated that the Fed is monitoring the sector but does not currently see a systemic threat. Even Jamie Dimon, one of the most vocal critics of private credit, has acknowledged that it “probably does not present a systemic risk.”

That does not mean there is no bubble. There may be. Some managers may have stretched for yield, mispriced liquidity, or crowded into weak credits. But that is exactly the kind of question markets should answer. 

If semiliquid funds overpromised liquidity, let investors punish them. If managers made bad bets, let losses expose them. If valuations were too generous, let markdowns do their job. 

A market does not prove its worth by never making mistakes. It proves its worth by revealing mistakes, pricing them honestly, and reallocating capital toward better uses.

That is why the wrong lesson from this episode would be more bailouts, more Federal Reserve backstopping, or another layer of Dodd-Frank-style micromanagement. 

The government has a rotten record here. It misses bubbles while they inflate, mislabels corrections as catastrophes, and then responds in ways that protect incumbents, distort prices further, and socialize losses.

Business owners and entrepreneurs are better served by more competition in finance, not less. They need a system where banks and nonbanks compete openly and fairly to meet real credit needs without Washington constantly tilting the field. Private credit may disperse risk more broadly than the concentrated banking model policymakers keep trying to preserve.
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Private credit deserves scrutiny, not caricature. If funds make bad decisions, let the market discipline them. If they make good decisions, let them grow. That process can be messy. It is still far healthier than a system where the government rigs incentives on the way up and then grabs more power on the way down.