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New Fed Report Shows High Leverage Poses Threat to U.S. Financial Stability: From Life Insurance Companies to Hedge Funds

Courtesy of Pam Martens

Assets by Financial Sector as of June 30, 2021

By Pam Martens and Russ Martens: November 9, 2021 ~

The word “leverage” appears 107 times in the Federal Reserve’s Financial Stability Report that was released yesterday. The second mention provides a warning of what happens when leverage blows up the financial system – something Americans learned all too well in 2008:

“Excessive leverage within the financial sector increases the risk that financial institutions will not have the ability to absorb even modest losses when hit by adverse shocks. In those situations, institutions will be forced to cut back lending, sell their assets, or, in extreme cases, shut down. Such responses can substantially impair credit access for households and businesses.”

Perhaps this is an understatement from the Fed. Not only did major institutions like Bear Stearns and Lehman Brothers “shut down” from insolvency in 2008, putting tens of thousands of workers out of a job, but this is also what can happen when too much leverage props up dubious assets on Wall Street: the taxpayer can have a gun put to their head to bail out every major trading house on Wall Street; the government can have a gun put to its head to nationalize Freddie Mac, Fannie Mae, and the giant insurer AIG in order to bail out the derivatives of Goldman Sachs and its brethren on Wall Street; millions of Americans can lose their jobs and their homes to foreclosure; the Federal Reserve can be forced to push interest rates to zero to prop up asset prices, thus forcing senior citizens to get by on a lot less of a return on their CDs and Treasury notes; and because so much capital was wasted on toxic assets instead of flowing to the real economy, the U.S. is still living through subpar economic growth, which is preventing tens of millions of Americans from earning a livable wage.

The Fed’s Stability Report had this to say on leverage lurking at life insurance companies:



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