Excessive leverage once again proved to be the weak point of our financial system. Does this mean that we face another financial crisis, this time located not in the banking system but in the wider economy? After a lost decade with slow growth well below long-run potential, there are now signs that the world economy is picking up. So, as interest rates rise, the discount rate will increase and asset prices will fall relative to incomes. A few unconnected defaults could lead to a reappraisal of the effective leverage of the financial system.

Source: Wall Street Journal September 25, 2017 02:03 UTC