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It can be argued that the leverage - reflected by how much collateral people or firms need to put down to borrow and might lose if they fail to pay the loan back - used in the financial system is one of the quantities that proved to be fatal for the unfolding of the recent financial crises:
http://www.bloomberg.com/news/2012-12-09/if-we-don-t-measure-leverage-we-risk-more-crises.html

The more surprising it is that this quantity doesn't seem to be systematically measured.

My question
Are there any good proxies with some history available that could be used to get a grip on that quantity?

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1 Answer 1

up vote 3 down vote accepted

It depends obviously on which specific leverage you attempt to measure but you can certainly build some sort of index from, for example, the below:

  • Aggregate smoothed equity P/E ratio divergence from long term mean (in a sense it reflects how money is levered to buy stocks at multiples of their long term P/E mean).

  • Broad money in circulation -> Money multipliers

  • Amount of outstanding prime/Alt-As/subprime loans outstanding , HELs, commercial mortgage loans

  • Discretionary consumer spending

  • commercial machine leases (not sure whether there is public information out on that)

  • Amount of business startups

I think it may be interesting to gather data on those and to compile an index, though I would estimate that it will not have much predictive power and is rather coincident or even slightly lagging.

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+1: These are really helpful ideas - Thank you! –  vonjd Aug 4 '13 at 14:08

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