Solving the Present Crisis and Managing the Leverage Cycle

John Geanakoplos ()
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos

No 1751, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: The present crisis is the bottom of a recurring problem that I call the leverage cycle, in which leverage gradually rises too high then suddenly falls much too low. The government must manage the leverage cycle in normal times by monitoring and regulating leverage to keep it from getting too high. In the crisis stage the government must stem the scary bad news that brought on the crisis, which often will entail coordinated write downs of principal; it must restore sane leverage by going around the banks and lending at lower collateral rates (not lower interest rates), and when necessary it must inject optimistic capital into firms and markets than cannot be allowed to fail. Economists and the Fed have for too long focused on interest rates and ignored collateral.

Keywords: Leverage; Collateral; Margins; Leverage cycle; Externality; Principal (search for similar items in EconPapers)
JEL-codes: E3 E32 G01 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2010-01
New Economics Papers: this item is included in nep-ban, nep-bec, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (147)

Published in Federal Reserve Bank of New York Economic Policy Review, August 2010, pp. 101-131

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