Leverage is down sharply.

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

The most straightforward answer seems to be leverage.

In Switzerland, the leverage ratio is now central.

Put differently, given a set of cash flows from a bank s assets, the bank s value is not affected by how those cash flows are distributed among investors, so more leverage does not reduce the bank s cost of funding.

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.

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.

Private sector deleveraging has barely begun.

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

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

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

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

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

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.

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.

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.

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.

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

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

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

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

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.

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

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.

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

For example, some leveraging of the budget could be allowed, although this would spark controversy, given that EU treaties require that the budget remains balanced at all times.

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.

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

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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.

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

The first reason is likely to create a long term drag on growth households need to deleverage and save more, which will constrain consumption for years.

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In such economies, that pattern not only typically depended on leverage it also enlarged the non tradable side of the economy and shrank the tradable side.

Under an international agreement known as Basel III, banks are to be required to hold a higher ratio of equity capital against risk weighted assets, and leverage is to be limited to a smaller percentage of such assets.

Fueled by massive credit growth (equivalent to 30 of GDP from 2008 to 2012), the Chinese economy has taken on a level of financial leverage that is the highest among emerging markets.

At the global level, the countries that spent too much the United States, the United Kingdom, Spain, Greece, and elsewhere now need to deleverage and are spending, consuming, and importing less.

But the banks are profitable ongoing enterprises in the current low interest rate environment, because they typically engage in short term borrowing and longer term lending at higher rates, with leverage.