Leverage is down sharply.

The most straightforward answer seems to be leverage.

In Switzerland, the leverage ratio is now central.

Banks balance sheets are systemically dangerous when bloated by leverage, and it is this that regulatory or fiscal policy should address through liquidity buffers and leverage ratios.

Usually, it is credit that provides the leverage, and credit is by nature reflexive.

Deleveraging by highly leveraged firms such as hedge funds will lead them to sell illiquid assets in illiquid markets.

Private sector deleveraging has barely begun.

As a result, by 2010, China s overall leverage ratio had risen by 30 .

So they also need clear, albeit different, limits on leverage.

The tradable sector is expanding and is not dependent on leverage to generate aggregate demand.

Economists who insist that China s financial leverage is not too high are a dwindling minority.

Moreover, the relative increase in debt (leverage) in the financial system was similar on both sides of the Atlantic.

The first round of fiscal stimulus, supported by credit easing, led local governments and the financial sector to increase their leverage ratios.

Assets bubbles will not disappear, but they will be less likely to be turbocharged by leverage.

Given their large, battered holdings of peripheral eurozone countries sovereign debt, many of Europe s thinly capitalized banks would be insolvent if their assets were marked to market.

But when growth does return, leverage will be far more tightly constrained than it was before.

Increasing leverage boosts returns on the upside but is very risky on the downside.

There is little excuse for Iceland, which essentially turned itself into a highly leveraged hedge fund.

There are many reasons for the underpricing of risk and the rise in leverage.

In other words, they would not wrap themselves up in their institutions equity and the leveraged products they were selling.

And the unrestrained expansion of financial markets, notably the proliferation of derivatives, led directly to the crisis that engulfed the Western banking system in 2007 2008.

By contrast, as a consequence of fiscal stimulus and socialization of part of the private sector s losses, there is now a massive re leveraging of the public sector.

At best, we face a protracted period of anemic, below trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment.

Eastern Europe has its problems, which are likely to impact Western Europe s highly leveraged banks.

This challenge, however, is very complex because deleveraging and rebalancing cannot be completed overnight.

Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest.

The hard part of fully realizing potential growth is shifting the composition of domestic demand from consumption to investment without adding leverage.

Some of the problems stem from the financial sector, which is once again taking advantage of low interest rates to pump up leverage in search of higher profits.

The search for return contributed to the reckless leverage and risk taking that underlay this crisis.

A better way to help banks and prevent them from simply deleveraging their business would be to establish full transparency and provide fresh money from taxpayers.

The main argument is that high leverage contributes powerfully to systemic risk a condition in which asset prices move in a highly correlated way, and distress, when it occurs, spreads quickly. Leverage is also partially caused by misperceptions of risk and mispricing of liquidity. It is desirable to constrain leverage, but not to the point of increasing the cost of capital and investment.

Because financial institutions held much of these securities, their market values declined as well, leaving balance sheets in need of restructuring, particularly given their highly leveraged capital structures.

These are highly leveraged businesses, typically funding their balance sheets with no more than 5 equity (and thus 95 debt).

Leveraging and bubbles were not limited to America s housing market, but also characterized housing markets in other countries.

While there is much talk about de leveraging as the crisis wanes, the reality is that private sector debt ratios have stabilized at very high levels.

At the end of the day, resolving private sector leverage problems by fully socializing private losses and re leveraging the public sector is risky.

Certainly the People s Bank of China, which engineered a credit squeeze in June in an attempt to discourage loan growth, seems to believe that financial leverage has risen to dangerous levels.

Both seem set for a long period of slow credit growth, owing both to necessary stricter financial regulation and to the fact that their economies remain significantly over leveraged.

Policymakers will continue to throw whatever ammunition they can find at the problem, but it will take time for the deleveraging from the boom to run its course.

In general, deleveraging by households, governments, and financial institutions should be gradual and supported by currency weakening if we are to avoid a double dip recession and a worsening of deflation.

Even were banks healthy, the deleveraging process and the associated loss of wealth means that, more likely than not, the economy will be weak.

Banks must pay for their implicit government guarantee by using less leverage and accepting restrictions on how they invest depositors money.

In particular, we understood that the rapid run up of house prices, coupled with the extension of leverage, posed macroeconomic dangers.

At present, financial firms are learning the lessons for themselves, reducing leverage and hoarding capital and cash, whereas the authorities are trying to persuade banks to expand lending precisely the strategy that led to the current crisis.

But he could have devised more specific measures, such as asking the Securities and Exchange Commission to freeze new share issues, because equity leveraging was fueling the bubble.