Why has modern financial theory ignored leverage?
This is the most amazing omission of modern finance. If I had started writing the book deep into the financial crisis I would have focused on this issue. Clearly leverage and lending changes risk; one minute you can pay and the next minute you can’t. With equities this isn’t as much of a problem because there is a continuum of potential payouts. Bond markets & leverage oriented markets don’t work that way and the core of financial theory doesn’t cover this concept. I heard a story of someone asking Eugene Fama about Minsky of which he had never read. This leads me to ask, what is your take on the tunnel vision of most PhDs? Fama is very extreme in that sense. He does his work and doesn’t see himself as a freelance intellectual opining about everything in the world. He sees himself as someone who is a borderline expert in this narrow area. That’s how academia works. In economics, people who try to explain things to the general public are looked at with suspicion by their colleagues (be
