Moody's Talks - Inside Economics - Mr. Financial System

Episode Date: May 19, 2026

If you want to get the skinny on anything related to financial markets or the financial system, then you need to talk with Samim Ghamami, Chief Economist of the New York state Insurance Fund.  That��s what Mark and Cris do on this podcast. The conversation begins with the outlook for interest rates, turns to a perspective on a popular AI narrative that artificial intelligence will push rates up further by spurring investment and reducing household savings, and closes with a timely look at private credit and the risks it may pose to the broader financial system. Check out the report mentioned in this episode titled, "Private Credit & Systemic Risk" by Samim Ghamani, Damien Moore, Antonio Weiss, Martin Wurm, and Mark Zandi: Click Here. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I've got one of my trusty co-hosts with me, Chris DeRides. Hey, Chris. Hi, Mark. Good to see you. Good to see you. I understand you've been pretty busy all day with client calls and other things. Yeah, typical day. As always, typical day. You too, I'm sure. This has been a more hectic day. I'm not sure why. Non-stop, you know, for me. A lot going on. But it's good to be on the podcast, safe place, you know, somewhere I can relax and have a nice conversation. And we've got a guest, Samim Kamami. Hey, Samin. Hi, Mark.

Good to see you. Hi, Chris. Good to see you. Hey, thank you for having me back. Yeah, welcome back. I think this is the second time on the podcast. And, I mean, oh, it's a third time. Oh, my gosh.

Oh, cool. You're a regular now. Yeah. I've been looking forward to it, yeah. Well, and each time you come on, you come on. And you're somewhere else, I mean, I was looking at your bio. It's an amazing bio. I'm sure I say this every time I introduce you, but every time I read it, I get amazed.

You were, and this is no particular chronological order, but you were at, or importance, you were at Goldman Sachs for a while. You were at the Office of Financial Research for a while. You're an adjunct professor at NYU. You were an adjunct professor at Columbia. You're at the SEC, of course. That's where we got to know you. Exactly. Done some work together.

And now you're the chief economist of the New York State Insurance Fund. Is that right? Exactly. Yep. Yeah. And what's your responsibilities at the New York State Insurance Fund? What do you do there? So I work with NYSIF as, I mean, they're chief economist.

And before Michael, I start, I'm just expressing my personal views. I'm reflected by NYCIF or any New York State government agency. But I work for NYSIF as a chief economist. So part of my responsibility is analyzing developments in the real economy, in financial markets, and helping NYSIF with different types of investment on the asset side of their balance sheet decisions and also interacting with their actuaries as well. So both side of the balance sheet of NYSIF as the essentially insurer of last resort for the state of New York. Got it, got it.

And, you know, when I think of you, Samin, I think of all things financial market and financial system. Anything related to the financial markets or financial system, call on Samin. I think it was the last time of the one before, the previous before that, we were talking about liquidity in the treasury market. And we'll come back to that. Sure. I also thought we'd talk about private credit that seems to be top of mind. And you and I, along with Damien Moore, Martin Worme, and Antonio Weiss, former Treasury official, have written a paper that we published a year ago, updated, recently, submitted to the New York Fed for their upcoming conference on private credit. I haven't heard back, as soon as I heard back, I'll let you know. Hopefully they accept that for the conference. Yeah, it's great. It's a great paper. probably because we wrote it. That's why we think that. So before we dive in, though,

we were chatting just before we went on the podcast about what's going on in Iran. Samim, you're of Iranian heritage. You've got family there, your mom and dad are there. And I was just asking how they're doing and what's going on there. Maybe you can just give us a sense of things. How are people coping in Iran with what's going on?

Yeah. I mean, like we discussed Mark offline, I think, I mean, any war is very tragic. And like you mentioned, I moved to the U.S. more than 20 years ago. I'm a U.S. citizen, but I have some close family members back in Iran. And I think it is very hard on just ordinary people in Iran, the war, which started around three months ago. So, yeah, hopefully it will end sometime soon. But your parents are fine, they're doing okay. Yeah, likely they're fine.

Yeah. And did they give you a sense of how the economy, I mean, if you read repressed reports here about the Iranian economy, the description is it's coming to a halt, a grinding halt. That's right. Is that fair characterization? Exactly. So inflation is rising.

And, I mean, it's public news that even before the war, the currency almost crashed compared to the U.S. dollar. So the economy is not doing well at all. Yeah. So go ahead, Chris. I was going to ask, how are common people coping in this environment? Do you have any insight in terms of, are they going to the countryside or barter?

What's the... No, I mean, I myself, I was born and raised into. My close family members are all in Tehran. So it's hard for them, but I mean, one thing to note is there has been different types of economic sanctions on Iran in the past 10, 15, maybe 20 years. And that I don't want to say that people have gotten used to this, but it's a different mindset compared to. us living here in the U.S. in terms of tolerating the inflation, all the economic pressures, and things like this.

So I guess the key question here in terms of how this war plays out is, do you think the Iranian regime, because of all the economic pressure, is going to relent, buckle, or are they going to hang tough in their negotiations with the U.S.? What's your sense of that? I mean, my sense is just guess is that, I mean, they're going to hang in there in the sense that, I mean, essentially because of the impact of the energy crisis or oil shock on the global economy. I mean, obviously less on U.S. compared to more developing, I mean, countries that. that are importing commodities, generally speaking. But at some point, it would also impact the U.S. economy.

And I think because of this experience of economic sanctions in the past couple of years, my sense is the goal of the regime would be to try to wait out this period. So that sounds... a bit disconcerting. Somebody's got to give. Right.

I hope I'm wrong, but that's how I think about it. Right. Right. Got it. Got it. Well, let's move on. And as I mentioned, I think the last time we had you on, we were talking about the Treasury bond market and some of the liquidity issues there.

I think when you were at the SEC, some of the research was centered around that particular issue. how are things going in the market? Are they, my sense is, and this is just based on just observation, is that the volatility in the market has subsided a bit. It doesn't feel quite as volatile, but I could be dead wrong about that. I mean, how are you feeling about the market at this point? So it's stable, maybe only compared to the COVID shock,

in March 2020 that we discussed last year or maybe around two years ago. I mean, my personal view is, I mean, the high-level potential issue is the supply demand imbalances in the treasury market because of the trajectory of the public debt and deficit in the U.S. But as you know, and we discussed before, the whole Treasury reform program in the U.S. carried out by the official sector. I had the opportunity to make some contributions to that from the SEC side last year and two years ago. I think that has been successful. It has been successful in maintaining liquidity in the treasury market and keeping the volatility

below the levels that we observed in March and April of 2020. But for instance, right after the Liberation Day last year, there was some disruption in the liquidity in the Treasury market. Again, nothing comparable to the COVID shock. But that was again another sign that at the end of the day, the Treasury market, because of this supply demand imbalances, could be fragile, at least from the market liquidity perspective. And you feel like that's still the case? I think that's still the case. But again, some of the components of the reform program have not implemented yet. So, for example, the treasury clearing rule by the SEC that was adopted one and a half year ago, it's going to be implemented, half part of it this coming December and the second part of it for.

for the repo market central clearing next summer, I think, in June 2027. So that was one component that we discussed in your podcast last year. Another component was, for example, the supplementary leverage ratio. I mean, at the higher level, bank regulation. I mean, improving bank regulation so that bank affiliated brokers, dealers would be able to absorb treasury securities and enhance their market-making capabilities, particularly during this stress periods. And as you know, I mean, this type of modifications to bank capital and liquidity regulations are

underway. One clear example was enhanced supplementary leverage ratio in the U.S. that went into effect, I think, last month. Have you noticed any change as a result of that adoption? Not since last April. I mean, in part maybe because when the Iran war broke almost three months ago, we naturally observed some heightened volatility in the treasury market. and government bond yields increase over a period of time, I mean, quite substantially.

Right, right. And so my sense of what you're saying is there are reforms that have been proposed and now we're being implemented over time. Up to this point in time, it's still early days. We'll also have to see how this plays out. but it feels like it's moving in the right direction, slowly, but moving in the right direction. Yes, but again, that would address only, from my perspective,

the short-run liquidity issues in the treasury market. I mean, the bigger problem is the supply demand imbalance that we can discuss further. So, for example, we know that recently when the Treasury would go through its auctions to essentially issue public debt, bond deals have become

more sensitive to essentially the issuance of public debt compared to a couple of years ago. So there are these issues that I think can't be addressed by different

components of the Treasury Reform Program that we discussed before. Yeah, and when you say supply and demand, I'm interpreting that as meaning we've got big budget deficits. The Treasury has to issue a lot of debt. That's a lot of supply. And the question is, who's the buyers of that debt? Where's that demand coming from? Exactly.

Right. Right. Well, you know, if you step back and you take a look at the 10-year treasury yield, let's say that's our benchmark. I think that's the appropriate thing to do. It's kind of been the yield on the 10-year treasury, has been kind of in a range. here for the last number of years, you know, extracting from brief periods of turmoil and markets, somewhere around four to four and a half percent on the 10-year-field.

And, you know, it's my thought, thinking, and this is based on work done with Damien and Martin, that that's kind of roughly sort of where it should be, you know, in the long run, that in the long run, when I say long run, I mean abstracting from the vagaries of the business cycle, that the 10-year yield should be roughly equal to the nominal potential growth rate of the economy. And if the nominal potential growth rate is 2% real growth plus 2%-ish kind of inflation, you get to 4%, 4.5% 10-year yields.

Is that framework roughly right? Is that kind of consistent the way you think about it? Exactly. Yes. Yeah, exactly. Completely agree. You completely agree. Okay.

And so then the next question I have is, shouldn't the, all the Treasury debt that's being issued, the big budget deficits that we have, and they're big, right? I mean, 6% of GDP. The primary deficit excluding interest payments is 3% of GDP, and that's in a full employment economy. The debt is increasing. The debt to GDP rate, publicly traded debt to GDP is 100%. I think we're right on the nose. And all the trend lines look.

like it's going to continue to rise. Given all that, why is it that 10-year treasury yields are only 4 to 4.5%? Why aren't they going higher at this point? Do you have a sense of that? So why do... So I think one way to think about it is, I mean, a couple of seconds ago, you mentioned between 4 and 1⁄2%. So one, I mean, one aspect of it is there is this range.

Another aspect of it is it's higher compared to the, even this range, 4 to 4.5% is well above the range before the COVID shock. So one, maybe another way to look at it is because of, of the structural forces outside of the business cycles that we can discuss after the COVID shock, now we are in a situation where the 10-year yield would stay above 4% for the foreseeable future. Part of that could be related to the trajectory of the public debt and deficit in the U.S. public part of that could be because of the change in the dynamics of RSTAR or the neutral rate after the COVID shock.

Chris, you understand what I'm saying? I mean, I guess if I can. Yeah. I can ask the question a different way. Go ahead. Is the reason. So one theory I have is that, well, the rate is relatively low compared to what you might otherwise think, even all the shocks.

inflation and everything we're seeing. But just on a relative basis, the U.S. still remains the most attractive bond market outside of the other alternatives, and therefore we're getting that exorbitant privilege once again, right? So but for that, the rate would be even higher. What do you, how do you respond to that? Is that a reasonable argument or is it more fundamental? I personally completely agree with you, Chris, that.

I mean, obviously we still have this so-called treasury convenience yield. But even that, or put it at the more general level, the exorbitant privilege, we know that that has empirically declined. So if we decompose that to the strength of the US dollar and the treasury convenience yield, So there are empirical results showing that, yes, we still enjoy this convenience seed on the treasury securities, but that has declined in the past 10, 15 years. But I completely agree with you that there is this convenience yield. Yeah. So I'm going to keep pushing some of me, so you got to just say stop, stop pushing, but I'll just keep pushing.

Because this is confusing me. I'm not sure in my own mind what's going on. So could another way of saying it is without the exorbitant privilege, without the convenience yield, yes, it has eroded, but it's still there. Absolutely. That without it, that the 10-year treasury yield would be 5%, 5.5%? It would be higher. Absolutely. It would be higher.

I mean, I guess we need to do some work to put a number around it, but absolutely, yes. Right. Okay. And so does that mean that if the reasons for why the exorbitant privilege is eroding, and kind of in my simplistic way of thinking about it, it is eroding, and it's eroding largely because the U.S. economy is pulling away from the rest of the world. You know, tariffs, immigration, foreign policy. you know, export restrictions, investment controls, you name it, we're pulling away.

The rest of the world is now pulling away from the United States because they say, hey, what's going on? You know, we don't like getting hit over the head. And so trade flows are starting to change. Investment flows are starting to change. And, you know, that's, that, that, the U.S. financial system is now less central to the global financial system. and that does mean that that exorbitant privilege is, it's not a cliff event. It's not like it's going, going, gone. It's like a corrosive, like it's slowly evaporating. Is that a fair characterization of how things are going? Yes, I completely agree.

So, I mean, one thing with regard to the financial system, I continue to view the U.S. as the financial center. in the world in the sense that it has the most diverse and deepest financial markets, including the U.S. Treasury market. That said, again, because of what you just mentioned, maybe moving away from the unipolar world because of this multipolar world, because of the impact of foreign policy, because of the impact of tariffs, and et cetera. so demand from the at least official sector in foreign countries for treasury securities has declined, again, relative to U.S. itself because we still don't have a viable alternative. But that decline would lead to the decline in the convenience of the treasury securities.

So does it mean that if current dynamics continue, you know, the U.S. continues to pull away, the rest of the world continues to pull away, the convenience yield continues to evaporate, slowly evaporate, all else equal. Does that suggest that the 10-year treasury yield is going to be higher 10 years from now, 15 years from now, 20 years from now? Absolutely, I think so, yeah. You think so? Okay. So one rule of thumb that we use based on. on our own empirical work, and it's consistent with work done at the Congressional Budget Office, the folks that do the budgeting for the U.S., is that for every percentage point increase in the debt-to-GDP ratio,

it adds something like a basis point to the 10-year yield. Does that, is that kind of what you're thinking? So if the debt to GDP goes from 100% to 125%, you know, 10, 15 years from now, that'll add 25 basis points, 0.25 percentage points to 10 years. I know that I don't want to imply too high level of precision here because, you know, that's, that only we can do that. But that's kind of directionally kind of how I think about it. Is that how you think about it as well?

Yes, exactly. The only difference is based on the literature, I think about it in terms of R-STR, in terms of the real rate, as opposed to the nominal rate. So one percentage point increase in the debt to GDP. ratio, three and a half basis point increase in R. Starr or the real rate. That's how I think about it. Well, that's a lot. You said three and a half basis points? Yeah. Okay. Oh, wow. That's scary. Right. I mean, because if you look at the CBO projections, and they're pretty benign. I mean, the underlying assumptions there are pretty conservative, right? They're assuming a lot of terror

for revenue that probably won't materialize or assuming no recession. The debt to GDP ratio is, Chris, correct me if I'm wrong. Do you know, I think we're like a hundred. 24%? 10 years from now? We're 124%.

Right now, 10 years from now, I don't remember. Oh, yeah. Well, that's the total debt as opposed to publicly traded debt. Publicly traded debt's 100%. Yeah. So I, boy, that's a scary future. Let me ask you another question, though,

in that regard. There's two ways for interest. rates to rise, I think. There are many ways, but two simplistic ways. One is the way we were just kind of discussing, and that it's a slow kind of monotonic, linear increase in rates, or it's a very discontinuous kind of increase in rates. Like bond market, there's this fine, it's fine, it's fine, it's still demand, rates stay low. All of a sudden, there's some kind of event that triggers a sell-up in the market, and we see a spike in interest rates. Are you agnostic to those two scenarios, or do you think one is more likely than the other?

I agree with you. I mean, personally, the way I put it is that we're going to be living in a higher interest rate environment, meaning the level would be well above the level that we experienced before COVID, let's say from 1990 to 2020, that's with regard to the level. And because of all these different types of shocks that the economic system would experience, we're going to have more volatility compared to, let's say, the 1990 to 2020 period,

except for the maybe global financial crisis period. So higher level and higher volatility. Got it, got it. Let's talk about related issue, and that's what the Federal Reserve is going to do or what the outlook is there there. And, you know, one question that's come up on the Fed, and I think Kevin Wurst, the new Fed chair, because we're requiring this on the 13th of May. I think he's going to be chair in two days, right?

That's right. Just got confirmed. Oh, did he? The Senate confirmed him? No, Senate confirmed him? Okay. Okay, great. Yep, very good. Not a surprise, but there it is.

He's made an argument that, you know, he's looking for, because of the president's desire, express desire for lower interest rates, for the Fed to cut rates. Kevin Warsh has been kind of searching for reasons why, from a policy perspective, you might want to do that. And one of the arguments he's given is AI, that AI will, because of the productivity gains generated by AI, put downward pressure on inflation, I think I've got the argument right. And therefore, that leaves room for the Fed to cut interest rates. And therefore, let's cut interest rates. What do you think of that argument?

And I kind of chuckle because it's chuckle worthy from my perspective. But go ahead. So I think the way I think the way I think. think about it is one, I'm personally in the camp that I think we are in a, we're going to be living in an inflationary environment for the foreseeable future, again, compared to the 1990 to 2020 period because of different structural forces, for example, the adverse impact of demographics, because of the shortage of labor supply, because of higher dependent. not just here in the US, but in other advanced economies, and also in China.

So we have more dependence than workers, so the environment is more inflationary. So then the question is how that can be mitigated. One would be to increase the participation rate, meaning if I retire at 65 and if I do at 90, I would find a way to keep working till I die, increasing the participation rate. Another way would be to increase productivity. And I think that's where the huge bet on AI in the US would come to play. So if productivity would increase, obviously I think it would mitigate the impact of high inflation. But then the question is whether we can cut rates, whether the Fed being the central

bank here in the U.S. can cut rates, I think then the question would be what would be the impact on R-STAR or the natural or neutral rate of interest. Then the way I think about it is forces that would push R-STAR up or bring it down. I think the There are a number of them. One would be the investment and saving behavior of the household sector and non-financial corporate sector in the U.S. So if we think that because of the AI boom, we're going to have more investments, less saving by non-financial corporates.

And similarly, households would think that, okay, future is bright, I'm going to consume more. save less, so then this would push RSTR Starr higher, right? So then in that scenario, I don't see how the Fed, the FOMC, could cut rates. So let's say by various estimates, for example, the well-known model of the New York Fed developed by John Williams

and his co-authors, RSTR is around 1.5%. inflation is now well above 2%. And let's forget about the Iran war, let's say 1.5% are sorry, inflation is just a little bit above 2%. 2.5%. Then the question is, how can you cut federal funds rate

below 3.5%. So. Oh, by the way, this is an advertisement. John Williams is going to be at the conference of business economists. That's a group of economists. I'm a member. And we're going to, I'm going to interview him tomorrow and night.

I think it's going to be streamed. And I'll bring up some of these things you're saying to him, Samim. I'll say Samim Gamami told me. Yeah. Hey, Chris, what do you think of just Samim just said, how he's thinking about AI and R Star? Yeah, I think it makes a lot of sense, right? especially the household argument of households anticipate they're going to get higher wages in the future

because now they're more productive and they're going to save less, right? So that makes a lot of sense to me and R-star would have to be higher. So I don't think it, yeah, I think it makes logical sense to me. Maybe in the short term, you have some, you know, the timing is everything, but longer term,

certain I'd expect the R-star to be higher. So, Samima, I don't know that, I'm going to tell you how I think about it. And I don't know that it's different. You tell me if you think it's different in some way. My sense is when you ask the question, all else equal, given AI, should you change interest rates, raise interest rates or cut interest rates? It depends on your kind of the horizon. Because in the here and now, my sense is that AI is pumping up demand in the economy more than you're seeing.

it affects supply through productivity. You're getting a lot of demand through the investment, the data centers being the poster child, you're getting a lot of it through the wealth effects. As AI stocks have risen, that's driven up wealth and consumer spending. That's demand. Supply is productivity, and there it's hard to see the productivity gains. I'm sure they're starting to happen, but they're more on the margin. So you get more demand than supply.

That means upper pressure on inflation. You can see it. You can see in electricity prices. You can see it in the cost of chips and other consumer electronics. It's adding to inflation. Therefore, in the current environment now, AI would actually all else equal argue for higher rates, not lower rates. And then let me just complete the thought and get your feedback.

In the longer run, you get the productivity effects. They start to kick in. And if we get anything close to what is expected by people in the AI, industry or economists or what we expect or what the CBO expects, that raises the economy's potential rate of growth, right? Because potential rate of growth is simplistically put the growth in the labor force and the growth in labor productivity. So if I get more productivity, I'm going to get more potential GDP. And that's what we go back to where we started. And that is, you know, the interest rate, the equilibrium yield, the R-star is ultimately determined by the potential growth

rate of the economy. So if you're getting more growth, then that would also argue for higher interest rates in the long run. So you might find a brief period where the supply side of the AI effects, the productivity gains swamped the demand side, that's kind of the job dystopia kind of concern. Maybe you get that, then you cut rates. But barring that, it feels like more likely you'll be raising rates as a result of AI, not cutting rates. Now, I said a lot there. Does that, Does that make sense? Yes, I completely agree with you with just one maybe caveat. See how he does that?

He's going to disagree in a very nice way. What caveat? Okay, go ahead. No, I agree with you. But the only caveat is so naturally and intuitively, we all think that R-Star is a function of the growth, rate, let's call it G. So these two are positively correlated.

I mean, obviously we also know that in at least almost all the dynamic general equilibrium models of R-star that I have seen, including the ones that we just discussed, developed by John Williams and his co-waters, R-star is a function of G and another, in their case, unobservable, variable. But despite of the fact that economically, intuitively, it makes sense, empirically, the correlation between R-Stor and G,

the positive correlation at times can be negligible. So that's why, that was one of the reason I mentioned to you that the way that I start thinking about it is by the desired investment and saving behavior of the household sector and non-financial corporate sector. Oh, I got it. Okay, that's kind of cool.

Kind of a different way of looking at it. So what you were saying is in the long run, maybe there's R-Star and potential growth are correlated, but it's kind of a loose relationship, certainly in the near term. And this, looking at things through the demand supply balance of loanable funds, corporate sector, household sector,

that gives you a better sense of where our store should be in the current point in time. Exactly. That's how I think about it. Yeah. Oh, interesting. Okay, very good.

Well, let's go into the last topic I wanted to prick your brain on, and that's private credit. And that's been, obviously, top of mind here. There's been a bit of a correction in the part of the private credit market known as Business Development Corps, BDCs. There's been a sell-off.

There feels like the precipitating factor has been, again, AI. AI is coming in, disintermediating, or at least the concern among investors is disintermediating SaaS companies, companies that sell software as a service because the thinking is AI can do these things and much more cheaply. And a lot of these private credit firms, BDCs have invested, have provided funds to these SaaS companies, and so there's been a correction there. maybe I'll frame it this way

because this is the way I'm trying to get a grip on it in my own mind given all the pluses and minuses of private credit is private credit a friend or a foe is it a good thing or is it a bad thing or something in between does that make sense what I'm asking?

Yes. So I think I personally think private credit is a good thing if we can monitor if we can measure and monitor potential vulnerabilities

that could be developed in the financial system because of the presence and high unprecedented growth in private credit. To put it simply, I think this is something Mark we have also

flagged in our paper as long as this market remains opaque compared to, for example, bank lending or the bond market, to put it very simply, things could happen in the private credit market that policymakers, regulators, may just realize only after a distress episode or crisis would hit the financial system. Okay, so private credit, that's just to make it clear to everybody, lending done by non-banks, and that primarily so far has been lending to non-financial corporations, businesses.

Yep. That's expanding. And private credits now is extending credit in lots of other ways to consumers and mortgages and CRE and all kinds of structure finance, all kinds of stuff. but the primary lending has been done to non-financial corpse. You're saying that that's a good thing. You know, there's what's wrong with that?

I mean, it's competition to the banking system. But you're saying it's good if we understand the risks that it's potentially posing. Exactly. Yeah, exactly. And I'm saying it's a good thing because, I think because of the importance of small and medium-sized businesses for the U.S. economy.

and because of the fact that when they have lower credit quality, probably they can't borrow from banks, and when they are not large enough, they cannot issue bonds in the bond market. So direct non-bank direct lending is good because of its credit provision to this part of the U.S. economy. I think that's absolutely a good thing. But at least from my personal perspective, the major concern is its opaqueness.

Got it. And do you think the recent kind of stumble among the BDCs and concern in that part of the world? How do you view that? Is that a positive development? Or do you worry that that's going to metastasize into something that's going to be more of a problem to the broader system? So I think because the size of the private credit market, at least in the U.S. is still contained, it's roughly 10% of the total non-back corporate debt. Because the size is contained, we can hopefully view this as an idiosyncratic event or series of idiosyncratic events and defaults and waves of redemptions. for these semi-liquid BDCs.

But again, I think that policymakers, regulators, should intervene now because otherwise it may get too late. Intervening now, I mean, finding ways to bring more transparency to the private credit market, to put it very simply. Got it, got it. Chris, do you have a perspective on the PC market? I know, I mean, I get that question. almost every talk I give, I'm sure you're getting that as well from clients. How do you respond? How do you think about it? Yeah, kind of similar response as Samim in the sense that it isn't a large, very large market, first of all. So the amount of damage you think, certainly in terms of direct damage you could do to the U.S. economy would be relatively small. And on the surface, certainly, it looks like it doesn't have many tentacles back into the formal banking system. So again,

it doesn't appear as though there would be a risk of some systematic event. But we don't know what we don't know, right? The opacity is really the main issue I see here. So just like the subprime crisis or prior to the subprime crisis, we thought everything was fairly contained as well, right? Are there perhaps some channels here we're not taking into account? So I think it's worth having on your radar screen, certainly a risk that we should be looking at.

I take some solace that it's now been there for a while and we did have, we have had some failures and the system seems to be self-correcting. It's not growing as fast as it was in the past, for example. So people are taking a much closer look. So I feel that as a healthy development here, but certainly something I'd still want to watch. I guess a question for some mean, if there was, if there is indeed some type of credit issue that evolves here, do you see that as a like a slow moving, type of problem that evolves over time or would this be a sudden stop liquidity event major correction that occurs in that market? What's your sense of the risk here? I think it could be a sudden stop in the sense that. So, for example, going back to one of the

main lessons learned from the global financial crisis was people who are in charge of monitoring financial stability in the official sector would need to think about triggers and weaknesses in the financial system, often called vulnerabilities. Some of them are particular to the GFC, liquidity transformation, maturity transformation, dependence of large banks, for example, back then on wholesale short-term fund. but two other vulnerabilities that were identified even back then was where complexity and interconnectedness. So exactly what we did in the paper with Mark and other collaborators, what we wanted to do was we wanted to see if we can measure and monitor interconnectedness in the financial system

in the presence of private credit. and it was a very challenging task to carry out just because of the lack of useful information on private credit funds. So that's how I think about it. Yeah, one thing we found in the paper, maybe you said this, I'll just say it again, if you did, was that we use BDCs as our proxy for private credit because we have data on BDCs that are publicly traded and they file with the SEC.

And we have data that goes back before the global financial crisis. So we have two really significant stress periods that we can examine how the BDCs interact with the rest of the system during those periods. And what we found was in the GFC, the banks were very central to the system. The system was still very much hub and spoke with the banks in the middle and everything else kind of revolving around it. by the time we got to the pandemic, that had changed, and it was less hub and spoke. The BDCs were more integrated with the system. Banks were less central. And the takeaway, at least for me, was, well, that's, again, going back to friend or foe.

The friend part of it is that, well, you've got a more dispersed financial system. So, you know, it's more likely the system can digest kind of typical garden variety economic shocks and dislocations, which is a good thing. But it's so because if something really goes off the rails, you get a big shock and the system starts to go down. There's no place where you would go to kind of shore things up. Like in the financial crisis, you knew where exactly you had to go to shore the system up. In fact, the day that the FDIC guaranteed bank debt was the day that the crisis started to abate because they were saying to the FDIC was saying to creditors, look, we've got your back and this is where we've got your back and that's that's that's that's that's that happened then

everything kind of settled throughout the system what we're saying now the system is changed because of private credit and there's there's no obvious place to go so that raises the risks that if you get into a very severe kind of event there it's very difficult to kind of write the ship do i have that right to me exactly exactly and at least for bDCs mark that you highlighted we use as proxies for, I mean, private credit in general, we rigorously empirically showed that over time after GFC, the financial system has become more interconnected. And during crisis episodes, for example, GFC and COVID, that level of interconnectedness really goes up. And we showed empirically that BDCs are one of the major contributors to this higher level of interconnectedness

during crisis episodes. So this is something that has been rigorous to show in our paper. And if we take it that interconnectedness, complexity are two potential vulnerabilities in the financial system, they need to be measured and monitored. And we only could, we were able to to do it only for BDCs, which are just a small subset of the private credit universe, just 10% of that. Yeah. Well, hopefully that paper gets accepted by the New York Fed.

That would be a lot of fun. It would be good to see you in person and present together at that. I think, Samim, unless you've got something else you want to scare us with, with regard to the financial system, maybe you're very measured. I'm sure, you know, you're, if you say we should be worried about something, I think that's a good sign we should be worried about something. So let me ask, should we be worried about something that we haven't done thinking

about? And the answer can be, and I would hope it would be, no, we're good, but just throwing it out there. Kind of like when the Senate asked Butterfield, is there any other thing you can tell us about the Nixon administration? And he goes, oh, what about those tapes? Do you look at those tapes? Is there anything out there that we should be worried about? So I think maybe I would flag only two or three things. Oh, my gosh. Very quickly, I mean, well-known, even if I don't state, everyone knows about it. Like we discussed at the beginning, the trajectory of public debt and deficit in the U.S. inflation.

We all hope that the Iran war, negative supply shock would be transitory. Even in that scenario, I would continue to be worried about inflation in the U.S. So public debt deficit inflation. And I would also be worried about potential disruptions and dislocations that AI could create in the labor market. And lastly, a potential burst of... AI bubble. Again, these are things that would need to be ideally measured and monitored carefully by the official sector so that, you know, hopefully the bet on AI would go through

for all of us. Yeah. Got it. Got it. Perfect. Perfect way to end the conversation. So, Samima, I really do want to thank you for coming on. You're, again, as I said, everything, Every time something comes up with regard to the financial markets or system, I think, of you. So we'll be back in touch and have you back on in your future. But in the meantime, thanks so much. Thank you very much, Mark. Thank you. Thank you, Chris.

Good to see you. And to you, dear listener, thanks for listening in. I hope you enjoyed the conversation. We'll talk to you soon. Take care now. Bye-bye.