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How Leverage Is A Cause Of The Recession

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The use of leverage is another cause of the recession. First, what needs to be explained is the process of leverage and how it was used in the time leading up to the recession. To start off using leverage to strengthen and speculate returns is dangerous. Yes in doing so you get the ability to increase your gains, but in doing so you increase your losses. In the months leading up to the recession obligations soared, households that piled on mortgage debt to the banks that leveraged their balance sheets to record levels. With the new information found blinder states that, leverage limits for the financial institutions of America are in need of reform. “Like a fine wine, a little leverage can be good for you. But just as with the consumption of alcoholic beverages, excesses can lead to disaster.” Another factor Blinder attributes to the caused of the Recession is the faulty regulatory environment. Pulling a quote for the book “The crisis [resulted from]...errors, misjudgments and even frauds by private companies and individuals, aided and abetted by a hands-off policy from a government unduly enamored of laissez-faire.” So one might ask, who was supposed to be supervising this? According to Blinder, “the Federal Reserve Board, looked away when subprime mortgages became 20% of all new mortgages in 2005.” However, not every regulator was quiet on this issue, many subscribed to have a free-market belief and viewed supervision as unnecessary restrictions on capitalism. Regulators
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