Learnings in class to follow-up
- Debt jubilees and waht (if any) worth is there in David Graeber’s work
- As more debt is accessible that enables investment toward ever riskier + NPV projects because the WACC lowers, right? Stock market is valuing the NPV of companies. So more + investment should increase value of companies. How to tell if the debt is self financing from NPV projects that pay for themselvs… Making a bet on future cash flow would be. Need future earnings. “Finance themselves off the bubble”
- The Fed like the FBI and other instutitons suffer from the unobservable prevention of doing their job. They’ll only be judged on what happens. YOu can say that for some this is always the case, but why is it specially uniqure for regulators and other s who have to take action that they can’t prove prevetns. Where does this connect in philosophy? Are there any formal theoryies or insights like this?
- Pilots know that catasophes are usually multiple failures
- Auction facility and when publicity is detrimental
- Possiblity of blockchain and demand side bailout insidtead of a supply side bailout in 2008
- 13.3 came down to a question of illiqiuidity and insolvency
- Wage scarring - more intense wage effects during a recession as opposed to being laid off during a normal economy
- Expansion longer than recession; investment and consumption more elastic/fluctuate more; regionality often shows up; wages rise slower post recession
- How would an economy operate beyond potential?
- People work longer…
- So normally a Labor + Capital are set at a particular rate
- Normal capital means?
- Labor is set at some participation above a floor of unemployment at ~40 hours
- The idea in the business cycle and covid, so if you have injection of covid stimulus that leads to an increase in the ouput of the economy that’s not sustainable at that level, so it would need to fall somewaht.
- So then inflation leads to a forced cooling of the economy becuase the increase in prices at some point damp demand
Leverage
- Deposit insurance as a way to end a negative feedback loop
- As more debt is accessible that enables investment toward ever riskier + NPV projects because the WACC lowers, right?
- Signals:
- Exceptionally extended forward purchases (50 year mortgages)
1. The setup
- Firm has $1,000 in assets.
- Financed with $900 debt + $100 equity.
- That means leverage ratio = Assets ÷ Equity = 10 to 1.
2. The key insight
- Debt stays fixed in nominal terms (lenders expect to be repaid).
- So when the asset side changes, all the adjustment falls on equity.
3. The mechanics in plain language
- Suppose assets fall by 2% = $20.
- Assets are now $980, debt is still $900 → equity shrinks from $100 → $80.
- Equity fell by 20% even though assets only fell by 2%.
That’s the leverage effect: a small percentage change in assets → a large percentage change in equity.
4. Why it matters (insight)
- If leverage rises (20:1, 50:1), equity becomes a thinner and thinner “cushion.”
- At 50:1, even a tiny drop in asset values wipes out all the equity → insolvency.
- This explains why highly leveraged institutions (like Lehman in 2008) are fragile: even modest market swings can bankrupt them.
5. Broader takeaways
- For investors: Leverage amplifies returns in both directions — great on the upside, catastrophic on the downside.
- For banks & regulators: Equity is the “shock absorber.” If it’s too small relative to assets, the financial system becomes unstable.
- For macro: Leverage cycles amplify booms and busts — asset bubbles fuel risk-taking until a small downturn cascades into crisis.
📌 One-liner you can use in class:
“This slide shows why leverage is a double-edged sword: it magnifies profits when assets rise, but even tiny losses can destroy equity when debt is high. That’s why financial crises often start in highly leveraged institutions.”
‣