Confronting the Hazards of Rising Leverage

By Adolfo Barajas and Fabio Natalucci عربي, 中文, Español, Français, 日本語, Português, Русский Leverage, the ability to borrow, is a double-edged sword. It can boost economic growth by allowing firms to invest in machinery to expand their scale of production, or by allowing people to purchase homes and cars or invest in education. During economic crises, it can play a particularly important role by providing a bridge to the economic recovery. The question becomes how to ensure that the fledgling recovery is not endangered, while at the same time avoiding an excessive buildup of leverage. Most recently, amid the sharp contraction in economic activity brought on by lockdowns and social distancing practices during the COVID-19 pandemic, policymakers took actions to ensure that firms and households could continue to access credit markets and borrow to cushion the downturn. Many firms managed to limit the number of workers they had to lay off. And cash-strapped households could continue to spend on necessary items such as rent, utilities, or groceries. However, high levels or rapid increases in leverage can represent a financial vulnerability, leaving the economy more exposed to a future severe downturn in activity or a sharp correction in asset prices. In fact, financial crises have often … Continue reading Confronting the Hazards of Rising Leverage