What is leverage cycle?

This is the rise and fall of leverage, or the use of borrowed money, over the course of the business cycle.

Where have you heard about leverage cycle?

You might have heard of the leverage cycle crisis from 2007-2009. Leverage dramatically increased in the US from 1999 to 2006, and the resulting subprime mortgage crisis was a key factor in the 2008 financial crash.

What you need to know about leverage cycle.

Leverage is the use of a small initial investment or borrowed money to gain a high return. A highly leveraged economy is one where a few investors have borrowed a lot of cash from its lenders. A highly leveraged company can cause problems when it fails, if this then increases the likelihood that other leveraged agents will follow suit. This has the potential to lead to the "too big to fail" problem exemplified by the collapse of Lehman Brothers in 2008.