Debt and Leverage
- 2020 Martin Wolf Coronavirus crisis lays bare the risks of financial leverage, again
This time it is capital markets, rather than banks, that have to reform
the late Hyman Minsky taught us: debt causes fragility
This will reinforce “heads, I win; tails, you lose” strategies. So vast is the size of
central bank and government rescues that moral hazard must be pervasive.
I think of this as trying to run capitalism with the least possible riskbearing capital. It makes little sense. This creates a microeconomic task — eliminating
incentives for the private sector to fund itself so heavily via debt; and a
macroeconomic one — reducing reliance on debt to generate aggregate demand
see p 18
A history of 2008 and its aftermath captures a moment in a paradigm shift
Crisis forces us to reconsider relationship between:
Real and monetary economy
National and international
Macro and Micro
Geography of globalization
Where power lies in the dollar based global financial system
- Globalisation: real and financial Hyun Song Shin
not separable Globalisation
Reflections on the Global Financial Crisis, through the lens of the U.S. balance of payments.
Blog Post by Brad W. Setser
The first sudden stop, of course, came in the summer of 2007. Foreign demand for U.S. corporate bonds had absolutely soared in 2005, 2006
The fall in bank flows came a bit later than the fall in corporate bond flows. But it was equally brutal
There was a third sudden stop: demand for Agencies dried up in the summer of 2008.
And the weakest link in the chain was the ability and willingness of private investors to take credit risk, not the ability and willingness of foreign central banks to add to their dollar holdings.