Is Business Deleveraging? Not on Main Street

I've noted in earlier posts that bank loans to business and total debt of business are not showing signs of a credit crunch.  Taking another view of the Federal Reserve's Flow of Funds data, let's look at debt-equity ratios for non-financial businesses:

Maybe there was a bit of deleveraging in the last quarter, but the non-financial business sector is still more leveraged than in the second quarter of last year.  Here's a longer-term look at business leverage:

(read the labels; this chart runs from 1960 through the present.)  The most recently quarterly change doesn't even show up as a drop relative to the thickness of the line on the chart.

Is there deleveraging going on?  Certainly in the financial sector.  Hedge funds, in particular, seem to be selling assets to pay off their debt.  (However, I haven't found good data on hedge funds.)  Consumers are probably deleveraging as well.  But the basic premise of the Geithner plan seems to unsupported by the data.  Businesses are not suddenly without credit.

Comments

[Chris Grande]

Bill,

Do you think debt/equity ratios are not falling because equity is falling making the D/E ratio stay high (even if some firms are paying off debt)?

Thanks,

Chris

[Bill Conerly]

Chris,
Good question. The equity definition I used here is book value, rather than market value, to try to avoid that issue.
Bill