Posted Jan 26, 2026 by Martin Armstrong |  

Private credit or direct lending soared in popularity after the 2008 recession when regulators cracked down on banks, but now, companies backed by direct loans are beginning to fail. Fears surrounding private lenders and their legitimacy are coming to a head.

Private credit is lending outside the traditional banking system. It exploded because regulation crushed banks, and when you choke off lending inside the banking system, the market simply moves outside of it. Now the cracks are showing. MSCI reported that write-downs on senior loans inside private credit have tripled since 2022. The $3.4 trillion in loans is expected to grow to $4.9 trillion over the next three years.

The Financial Times reported that investors have pulled billions from the largest private credit funds recently, and a change in perception is precisely how events begin to unfold. Confidence turns, and people realize liquidity is not guaranteed, which can easily turn into panic. Lenders cannot sell if no one wants to buy, and borrowers cannot redeem funds that are tied up.

Private credit has been sold as a safe bet since it does not move daily. There is no ticker symbol flashing red every second. The situation may be fine in an uptrend, but now even BlackRock is coming out to claim “defaults are normal.” But this current market began in a fantasy world where rates would remain artificially low forever.

This private credit mania is also tied to the AI spending surge. Big Tech is issuing record debt to fund the AI buildout. The Guardian even noted how much of this financing is migrating toward private credit and other structures rather than traditional bank balance sheets.

Every bubble has a “new era” narrative. The Roaring 20s had radio and electrification. The late 90s had the internet. The 2000s had housing “never goes down.” Now it’s AI and people borrowing in anticipation of excessive cash flows without thought to what will happen if projections fail.

Private credit has been sold as an escape from traditional banking, but when it implodes, regulators will swoop in and use it to justify expanding government control.