Don't ask me why, but I suddenly began wondering about leverage in the financial system. I pretty much believe that excessive leverage is the key to all bad things in the world, so I took a quick peek at a generic measure of systemwide leverage produced by the Chicago Fed. Here it is:
Everything seems fine. I just thought I'd pass that along.
This is not really leverage or anything that would forecast a crash. We know that there was a real-estate bubble with all kinds of bad mortgages which peaked around 2006-2007. The shadow banking system had leveraged itself on those bad debts. Kevin's diagram shows nothing wrong at that time. By 2008 things were already falling apart. In other words if things are fine now they were also fine in 2006-7, which is nonsense. This parameter, whatever it is, is showing no predictive value.
I was about to say something similar. And even if we looked at the asset classes that caused the '08 bust, we'd likely be looking at that last war, while financial markets had created a whole new set of esoteric financial vehicles to crash the economy we normal folk have yet to even hear about.
Seems like a good point.
I think that’s right. Yes, this is a chart. And, yes, it seems to measure something. But it doesn’t measure any of the things that caused the crash and that brought the world’s financial system to the brink of collapse.
I should add that there were predictive parameters - for example house prices - and some people did sound the alarm about the danger of the bubble, but actually the nature of the dangers in the financial system, such as the growth of shadow banking and credit-default swaps, were not completely perceived by anyone (these things certainly are not in the graph that Kevin shows). Now we have a situation with definite bubble signals - stock market fundamentals are bubblier than ever except for the 2000 peak and very high corporate debt - but no major perceived leverage danger. Crashes happen because the dangers signs are not appreciated, usually out of overconfidence of some kind.
Not all debt is created equal. Housing prices were a effect, not a cause. The surge in mortgage debt in the 2002-5 time period is a cause and clearly evident during the time. Corporate debt isn't related to the financial heartland like mortgages are. As long as the banking system is basically functional, corporate defaults are like the early 2000's window, a period of investment withdrawal.
Have to note here the little bit of Red there 2020. Looks to me like Covid saved us from being in a bad place.