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How much leverage is too much? What role should the Fed play in unwinding a large highly leveraged Hedge fund or bank?
Kohn suggests that the Fed job is to govern and help unwind large banks.
Leveraging is views as a hedge against risk. However, as contracts stack the risk of a topple, if it should happen is astronomical. What strategy should the fed follow in helping large institution unwind? Will this private entities cooperate?
Leveraging is views as a hedge against risk. However, as contracts stack the risk of a topple, if it should happen is astronomical. What strategy should the fed follow in helping large institution unwind? Will this private entities cooperate?
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Determining adequate leverage is really calculating an opportunity cost. You borrow now to pay back later implying that what you can do with the money now is more compelling than what you could do with the money later after you earned it instead of paying it back. GDP is $14 trillion and the current budget deficit is projected to be $1+ trillion. Generally, debt outstanding is compared to GDP and economies that have debt in excess of 75-100% of GDP begin to be considered at risk of distress.
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