R&R: It's the Leverage, Stupid

Reinhart and Rogoff are interviewed. Rogoff says,

This idea that we'll get rid of too-big to fail banks and we'll be OK -- that's nuts because a really big bank is only going to fail if there's a systemic crisis. But if there's a systemic crisis a lot of little banks are going to fail too, and it's not credible that your going to let so many little banks go. The government needs to have much stronger regulation on short-term borrowing to try to prevent the short-term leverage buildups that the financial system tends to gravitate towards. That's a recurrent theme across most of the crises that we looked at. There's a huge build-up of short-term leverage somewhere in the system -- could be consumers, corporates, the government -- and it gives this false sense of profitability and sustainability that collapses when confidence is lost.

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