This is a summary of the book titled “Leveraged: the new economics of debt and financial fragility” written by Prof.Moritz Schularick and published by University of Chicago Press in 2022. This collection of essays presents an overview of the latest thinking and their practical implications. Assumptions such as those before 2008 that financial institutions will just be fine, are questioned in some contexts and the work of Hyman Minsky who explained human nature’s tendency towards boom-and-bust cycles is a recurring theme and inspiration.

Credit and leverage are fundamental factors in recent crises. Credit booms distort economies and slowdowns follow. A banking system with higher capital to lending ratios does not affect the financial crisis. Financial sector expectations drive lending booms and busts. When credit grows, the price of risk is lowered. A historical categorization of financial crises might just be worth it. This might reveal that a great depression might have been a credit boom gone wrong. Even though credit plays such a big role in creating instability, its policy implications are far from straightforward.

Credit booms distort economies and lead to economic slowdowns. Current financial system regulation is too focused on minimizing the risk of banks getting into trouble, which leads to a dramatic drop in consumer spending and loss of confidence in the wider economy. To address this, the current structure of banking regulation should split risk between creditors and debtors in a socially beneficial manner. One way to tackle this is using "state-contingent contracting" (SCCs), which automatically reduce the amount a borrower needs to pay back during a downturn. Examples of SCCs include student loans and loans to countries based on GDP growth. Credit booms often generate distortions and vulnerabilities that often end in crises. The 2008 financial crisis revealed that both executives and shareholders take risks underwritten by the taxpayer. To address this, "lockups" or "debt-based compensation" for bankers' pay could be created, setting the condition that there will not be bankruptcies or taxpayer bailouts for some time after the remuneration period.

Excessive subprime lending was a popular narrative that led to the 2008 US financial crisis. However, non-investors, such as real estate investors, often had other non-real estate loans in distress, leading to policy implications that differ from those based on the notion that subprime borrowers drove the crisis. Young professionals, who were approximately 14% of all borrowers, represented almost 50% of foreclosures during the crisis's peak. A banking system with higher capital-to-lending ratios does not affect the likelihood of a financial crisis. Despite regulations increasing capital after previous crises, no evidence suggests that banks with more capital suffered less during that period. Research shows that better capital ratios do have an influence on recovery from a crisis. Financial sector expectations drive lending booms and busts, as they amplify trends of the recent past and neglect the mean reversion that long-term data suggests.

Investment industry methodology could improve the process of assessing the riskiness of banks, as recent crises have shown. Portfolio-assessing methodology, which combines market data and bank accounting data, could be a useful tool for banks to assess their risk. Studies show that low asset volatility in the past can predict credit growth, as agents update their views on risk based on the past and are overoptimistic about risk going forward. This could lead to excessive risk, resulting in fragility and raising the likelihood of a bad event.

A comprehensive historical categorization of financial crises is valuable, as it focuses on real-time metrics like bank equity returns, credit spread measures, credit distress metrics, nonperforming loan rates, and other bank data. This quantitative approach contrasts with the vagaries of commentators reporting on financial crises and the filtration of narratives by historians.

Narrative accounts of crises are still valuable, but research reveals that some "quiet crises" with less impact on the general economy have been forgotten or misunderstood. The spread of government-backed deposit insurance and the shift from lending to businesses to real estate were significant events in the US Great Depression.

The US Great Depression may have been a credit boom gone wrong, as credit played a crucial role in generating the bubble. The growth of the money supply continued until 1926, but credit growth continued for a few manic years. Total private credit reached 156% in 1929, more than other developed countries. The New York Fed pressured member banks to cap brokers' loans, but interest rates on brokers' loans proved attractive, leading to nonmember banks, financial institutions, companies, and individuals filling the gap. The Federal Reserve raised interest rates in 1928 to contain the boom, but the stock market continued to rise, attracting money from abroad. The importance of credit in creating financial instability has revived since the 2008 crisis. Evidence suggests that the allocation of credit matters as much as its quantity, and excessive credit directed toward real estate is more likely to come before a financial crisis.