There are lots of culprits in the current financial crisis and now major regulatory changes have been proposed to deal with all of the presumed issues. But underlying almost every one of the individual issues from commercial real estate lending, subprime mortgages, credit default swaps, home foreclosures, and corporate and personal bankruptcies is a more global meta-issue: leverage. Even significant declines in asset prices are manageable, albeit unpleasant, if leverage is not excessive.
This Ahead of the Tape piece from the Wall Street Journal points out the need for a leverage scorecard and transparency about who is borrowing what. Something this simple would go a long way toward preventing future systemic problems. (I’m crossing my fingers that the link is public!)
