Nope. You can't get surplus leverage if there is a deficit of supply for the underlying factor. E.g. you can't get a loan with 0% down (infinite leverage) for an office building and then get in financial trouble if a dozen tenants are constantly bidding to get into your building.
Instead, where you get into trouble with leverage is when demand for your building subsides.
So, again...the core problem is global overcapacity.
Loaning the money wildly comes in a distant 2nd place...and derivatives are financial zero sum non-events. Derivatives, even with massive notional values, are trivial because the money merely moves between players instead of wealth being created or destroyed.
So 100 to 1 leverage would have worked provided that demand never decreased to reduce asset values by 1%. And if demand looks like it is about to go down, we can just increase leverage to create more demand. You are right, leverage is second place so long as demand increases monotonically. In that case asset prices will never get ahead of demand so they will never drop and wipe out the principle.
Sounds nice, but unfortunately impossible in the real world. So the leverage becomes a problem, the more the leverage, the bigger the problem.
Understood. I only mention derivative and fractional reserves because they create systemic risk. Under the current circumstances, Citi cannot fail without bringing down the other large banks and other financial entities (e.g. insurance companies). There is no deflation risk from derivatives, but massive derivative positions ensure financial collapse when there is enough deleveraging to bring down a large player. No spiral, just collapse.