The next financial crisis will start here.

• Author: Dayen, Dave

"When will the next financial crisis happen, and where will it occur?"

This trillion-dollar question remains firmly implanted in the minds of every financial analyst, business reporter, and government regulator in America today. If I knew the answer precisely, I could either prevent a lot of suffering or make a lot of money betting on the collapse.

I don't have the exact answer. The specifics of where and when financial crises will originate are obscure. But we do know that such crises normally result from an excess of risk. Widespread borrowing accumulates somewhere in the financial system, everyone believes it will only lead to profit, and when it goes sour, borrowers cannot cover their debts. From there, our endlessly interconnected financial system spreads the cascading losses across many institutions, and suddenly everyone becomes afraid to lend for fear of getting caught holding the bag.

In 2008, that excess risk rose up from subprime mortgages. Today, risk is pooling in a different area: corporate debt. From multinationals to small businesses, corporate debt has exploded over the past two years, alarming regulators and policymakers.

"In many ways, this is a test of all the mechanisms that caused the financial crisis," says one fearful Senate Democratic aide. "If there's another crisis, this is where it might start."

A clear example of this gold rush can be seen in Apple's $17 billion corporate bond sale last year, the largest on record and the tech giant's first since 1996. Apple, with $158 billion in cash reserves, has little need to borrow money.

But thanks to several years of low Federal Reserve interest rates, it's become so cheap for corporations to borrow that big firms who resist just leave money on the table. Tellingly, Apple plans to use the funds not to develop new products or finance new capital investments, but simply to boost returns to shareholders. So the increased borrowing risk doesn't even improve the economy; it goes straight from the fruits of worker productivity into the accounts of the top 1 percent.

Many corporate bond offerings are more dangerous than Apple's, however. In fact, Wall Street describes them as "junk bonds," which offer a higher return because of the higher risk of default. That's attractive to investors, who have been "reaching for yield" above what safer investments will produce. Since March 2009, the junk bond market has doubled to $2 trillion, as worries about risk have flown out the window...