Contrary to the beliefs of most macroeconomists, the financial sector in the United States has grown too large in the last few decades as a consequence of financial innovation that has encouraged the use of too much “leverage” (financing with debt) by financial institutions (as well as by consumers and other borrowers). In Part II, I connect the dots between excessive leverage, risk, and financial market volatility. In Part III, I explore the role that the “shadow-banking sector” has had in driving leverage. In Part IV, I explain why leverage at the level of financial institutions matters for the macroeconomy. In Part V, I argue that excessive leverage causes instability in financial markets and in the economy as a whole. Finally, I conclude by arguing that these problems in the financial sector will not be selfcorrecting because leverage has helped to drive up profits and incomes over time in the financial sector.
Margaret M. Blair, Making Money: Leverage and Private Sector Money Creation, 36 SEATTLE U. L. REV. 417 (2013).
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