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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Freedom Fighter who wrote (850)3/25/1999 10:05:00 PM
From: Henry Volquardsen  Read Replies (2) of 2794
 
Wayne,

Credit expansion is a concern regardless of which segment of the economy it occurs in. Excessive debt is excessive debt. Period.

That said I don't believe credit expansion has been excessive in the financial sector. Financial sector debt needs to be measured in relation to the capital supporting it. Since the banking troubles of the 70s and 80s the Fed has been aggressively promoting increased capital requirements. Bank capital ratios are stronger today than they were in the 80s. This would imply that if credit has been expanding rapidly then capital has been growing faster.

I would be interested in any specific numbers you might have.

But as a general rule I very much agree that excessive leverage is dangerous. It has been my opinion that a lot of the concerns people have about derivative risks are actually concerns about leverage. They have been packaged in some way to make people believe they are an exotic derivative when all they are is old fashioned leverage.

Henry
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