Reisman on Inventories and Bankruptcy

I have been reading some of George Reisman's massive book Capitalism, more than 1000 pages. It is a fine book, but I find some of the appendix to Chapter 13 puzzling. The appendix is about overproduction, inventories, expansion and depression. He aims to refute the idea that excess inventories cause depressions (or recessions). I can agree with that, but the puzzles remain.

"What is true is that an enterprise can be plunged into bankruptcy if it holds an excessive inventory that is financed by the incurrence of debt. But then the cause is not the inventory, but the debt" (p. 597).

This blaming strikes me as one-sided. Bankruptcy occurs when the value of debt exceeds the value of assets. In other words, assets minus liabilities is less than zero. Bankruptcy is thus a relationship between assets and liabilities, not one side alone.  

"The existence of assets can never be the cause of bankruptcies" (p. 599).

This makes sense only if the enterprise has no debt at all. Bankruptcy means debts exceed assets. But if there is no debt, then bankruptcy is not an issue.

Suppose on a given date a firm has assets = $120 and debt = $100; a year later assets = $80 and debt = $100. It goes from not bankrupt to bankrupt, with no change in debt. It seems right to me for this case to say the assets were the cause.

I submit that assets in the form of excess, unsold inventory can indeed lead to bankruptcy. What typically precedes bankruptcy is the inability of a firm to pay its creditors and having too much debt. The debt is often the result of acquiring assets when prices are high, that is, compared to what they can be sold at or current market values much lower.

Indeed, this is what happened in the Great Recession 2007-09. For years banks had bundled mortgages (and other debt instruments) into complex securities called collateralized debt obligations (CDOs), slicing and dicing the mortgage cash flows into "tranches" in the process. The banks then sold the CDOs to other investors. Weeks and even months elapsed between acquiring the mortgages to make a CDO and selling the tranches. Most of this security creation was financed by borrowing -- selling commercial paper. When housing prices plummeted and mortgages began defaulting, the market value of the CDOs and mortgage-based assets on a bank's balance sheet (or off-balance sheet entity) plummeted. CDO buyers stopped buying, and the lenders declined making or renewing loans and even demanded loans be repaid. Many banks became bankrupt.