Financial crisis

In 2008 the world financial system came close to a complete meltdown. dropdown but how can a repeat be avoided? In the first instance we need to understand what brought us to the brink – dropdown that was unwittingly leading us to the cliff edge. Just what led to the meltdown? Certainly there wasn't a single factor dropdown From the mid 1990s financial institutions were putting more and more money into dropdown Some of these investments – like credit default swaps – are very difficult to understand (the New York Times called them "arcane" in one article) but dropdown than the technique called leverage that was (and is) used to make those investments. Arguably, understanding what leverage is, dropdown So what is leverage? In essence,dropdown If you have $20,000 (and if the economy is ticking over quite nicely) dropdown Let's say you are loaned 19 times your original amount, making the total sum $400,000. Wow! dropdown The value increases by 10%. dropdown and count your profits and find that you have made $40,000. Instead of the 10% profit dropdown you have made 200%!! Of course you have to pay interest on the money you borrowed, and 1dropdown but 100% profit ($20,000) is still way, way better than 10% ($2,000).