In a paper looking back at the financial crisis, former Fed Chairman Alan Greenspan wrote: Some bubbles burst without severe economic consequences, the dotcom boom and the rapid run-up of stock prices in the spring of 1987, for example. Others burst with severe deflationary consequences. That class of bubbles … appears to be a function of the degree of debt leverage in the financial sector, particularly when the maturity of debt is less than the maturity of the assets it funds.
a. What does Greenspan mean by “debt leverage”?
b. Why would it matter if “the maturity of the debt is less than the maturity of the assets it funds”?
c. Does Greenspan’s analysis provide insight into why the Fed during his tenure may have been reluctant to take action against asset bubbles?