John Geanakoplos

John Geanakoplos is a Professor of Economics at Yale University and a partner at Ellington Capital Management, a hedge fund specializing in mortgage-backed securities. He developed the "leverage cycle" theory of financial crises, which focuses on how changes in collateral requirements (margins) propagate through the financial system. The theory explains that in good times, lenders require minimal collateral, allowing leverage to build up. When adverse shocks occur, collateral requirements are tightened simultaneously across the system, forcing leveraged investors to sell assets simultaneously, amplifying price declines and creating a self-reinforcing crisis. This mechanism was central to the 2008 financial crisis. Geanakoplos's unique position spanning academic theory and practical mortgage market analysis gives his work unusual empirical grounding.