Increasing attention to leverage cycles and collateral valuations as sources of macroeconomic risk seems to be very welcome. Leverage and trend-chasing are the two major sources of demand-for-assets curves that slope the wrong way: when prices drop demand falls, either because you need to liquidate in order to repay now-undercollateralized loans or because you do not want to be long in a bear market. And there is every reason to think the government need to take very strong steps to make effective demand curves slope the proper way: Felix Martin: Will there be another crash in 2019?: "One important detail is that this effect is achieved not only directly, by adjusting the cost of borrowing, but also indirectly by making assets cheaper or more expensive...
...When the interest rate available from the central bank falls, other, higher-yielding assets become more attractive–so their prices get pushed up. When the policy rate rises, by contrast, alternative assets look relatively less alluring–so they are sold down, until their price falls enough to entice savers back. Because borrowing at any scale depends not just on cost but on collateral, this valuation effect of monetary policy constitutes a second important channel of its effectiveness. When interest rates fall, the value of capital assets used as collateral for loans–be they shares, intellectual property, or real estate–inflates. As a result, credit becomes not only cheaper to service, but easier to access...
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