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Leverage as the Cause of the Global Financial Crisis

Guest post by: sam levitz

Article Overview: Throughout the world, the financial crisis has become a wide stream cause of worry. When the news about the economic crisis broke, people started to panic about their money, jobs and assets. They took back their investments on mutual funds, banks and even real estate.

Leverage as the Cause of the Global Financial Crisis

Throughout the world, the financial crisis has become a wide stream cause of worry. When the news about the economic crisis broke, people started to panic about their money, jobs and assets. They took back their investments on mutual funds, banks and even real estate. At the same time, a number of people have been laid off from their jobs. Although the economy is slowly healing from the crisis, many are still worried about what really caused it. Many people say that the crisis was due to the employment rate, capitalization, and even the sudden rebuttal of investors. But one such cause of the crisis, financial leverage, is said to be the one responsible for the havoc. However, a lot of people are unaware what this is.

The term leverage is also used in physics. It refers to the use of a lever along with a small amount of force that lifts a heavy object. In some ways, the same definition can be applied to economics. This leverage denotes using a relatively small amount of debt or investment to achieve a greater profit. In short, assets and liabilities were used to boost profit while risk balancing was involved.

There are two different types of leverage. These are known as financial and operating. Financial leverage results from using debt and preferred stock in order to increase the earnings of a stockholder. On the other hand, operating leverage refers to using the fixed costs of a company's earnings stream in order to magnify operating profits. Although these two types involve a certain degree of risk, they are still able significant benefits once they are successfully implemented.

Needless to say, leverage was what caused the global financial crisis that recently affected our economy. It was because of poor judgment that companies were unable to foresee the risks involved with their investments. A number of these companies have already filed for bankruptcy. Meanwhile, there are also others that were able to survive the crisis. This is because they did not risk a significant amount of money compared to those that have become bankrupt.

But as Karl Marx once said, the financial crisis is a solitary phenomenon. It is an important part in the capitalist economic system. Despite the fact that it has happened before, the crisis is only temporary.

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Article Tags: economic crisis, financial crisis, financial leverage, global financial crisis
Referred by: http://jaykubassek.com



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