Thursday, June 17, 2010

It's All About Leverage

Buttonwood:
Asset bubbles and rising debt levels go together

Crises are caused by bubbles.
Bubbles are caused by rising debt levels, i.e. leverage.
Therefore, controlling leverage will control crises.

The more FLG has thought about this, the more he is convinced. If people are talking about financial regulation to mitigate system-wide risk, then they need to be talking about leverage. If they are talking about anything else, then they have a political hobby horse or deeply mistaken about what causes crises.

1 comment:

The Ancient said...

FYI:

http://www.iie.com/publications/papers/niarchos-ferguson-2010.pdf

 
Creative Commons License
This work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.