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This is exactly what's wrong these days....Leverage is simple. Take a rich retired person who has amassed a lifetime of wealth & assets that is 25 times more than the average citizens. They leverage all that 40 to one on a bet & lose. They just lost 40 times more than their life's work or 1,000 times more than the average citizens life's work. Now 1,000 other peoples life savings & assets have go to pay for that one idiots bad bet.
Wait, not that silly 'leverage' nonsense you were spewing. What's wrong is that this is what too many otherwise intelligent people are actually believing.
When a large bank or GSE increases leverage & lowers credit standards it is increasing the money supply & velocity of money. This causes inflation for the rest of us. There needs to be limits otherwise we have bubbles. Engines have throttles for a reason. If they did not they would run wide open & blow up. Of course that means it completely seizes up & stops. We need some sort of throttle that is not revved up & down by politicians.
The congress "regulated" GSEs did worse than the private sector with leverage. The private sector was bad with credit standards. "low-doc" or "stated-income" mortgages defaulted at a higher rate.
It is possible that switching from the regulated to unregulated system blew up all the bad apples at one time that were previously kept in check & that it won't happen again, but that is an unknown. Maybe all the bad "stated-income" barrowers have now trashed their credit & there will be minimal defaults from here on out.
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