A highly leveraged financial system is one prone to collapse. This notion underlies modern financial regulation: the control of systemic risk requires controlling leverage. And, it is what drives proposals for high capital requirements and to tax leverage. But, as is always the case with regulation, the devil is in the details. For one thing, we need a way to measure leverage. This turns out to be a surprisingly difficult task. Second, while risk varies positively with leverage, risk-taking can increase without increasing leverage, so we need to think about all major forms of risk-taking that can threaten financial stability...
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If we asked you the value of your assets, how close would you get? Okay, we’ll give you a few hours to figure it out, but you need to include the value of the house and car(s). Do you think you could estimate the value to within 0.2%?Read More