Leverage — borrowing money to invest — is the most dangerous accelerant in financial markets. It amplifies gains in good times and magnifies losses in bad ones. A 10% decline wipes out an investor leveraged 10-to-1.

Before 2008, major investment banks operated at leverage ratios of 30-to-1 or higher. At that level, a mere 3% drop in asset values could erase their entire capital base.

Leverage also creates a vicious feedback loop during crashes. Falling prices force leveraged investors to sell, which pushes prices down further, which forces more selling. This spiral can drive prices far below any reasonable value.