Leverage explains vulnerability but not the specific cause of a financial collapse.

Evidence

Blaming LTCM’s crisis on leverage is similar to attributing a plane crash to the fact that the aircraft was no longer safely in contact with the ground: it identifies the source of overall vulnerability but not the specific cause. That cause was the financial crisis of August and September 1998, and in particular the way in which the adverse price movements of those months exceeded LTCM’s, or anyone else’s, expectations. — Donald MacKenzie, An Engine, Not a Camera, 1021

Categorization

• XREF: connects to: Sweden’s 1989-1993 collapse came from asset bubbles and currency crisis, not debt fears — Mark Blyth, Austerity: The History of a Dangerous…, 573; High bank leverage turns small asset declines into instant illiquidity and insolvency. — Mark Blyth, Austerity: The History of a Dangerous…, 84; Ireland and Spain’s crises stemmed from bank real-estate lending, not fiscal profligacy — Mark Blyth, Austerity: The History of a Dangerous…, 181 (+4 more)

Broader Connections

• Financial leverage amplifies both gains and losses and underpins private equity and hedge funds #expands (0.78)
• Packing risky mortgages into opaque derivatives under weak regulation enabled the financial crisis #expands (0.72) — Albert Bandura, Moral Disengagement, 1492