For much of the 2000s, short term interest rates have gravitated downward to levels not seen since the early 70s. The federal funds rate has been in a range of 1% to 5.25% during this time, with the lowest rates occurring in times of perceived economic or market crises. Real rates of return have been negative for extended periods and have sparked and encouraged excessive leverage from which we are trying to unwind ourselves now.

This environment experienced in the 00s prompts an obvious question. Is leverage to be revered more as a source of return or a measure of risk? How could this issue become so confused to so many in the last few years?

There is no doubt that easy money created the recent environment for levels of leverage we’ve never before seen. So many traders assumed that cheap leverage would always be readily available and that it would allow one to take a good idea and turn it into a great idea by levering more and more. Market participants totally confused the fact that continued use of leverage in an effort to produce higher and higher returns only works in a world void of financial stress. Little consideration was given to the idea that credit could be unavailable at virtually any price, such as in cases of Bear, Lehman and others.

It is obvious by now that leverage has far more to do with risk rather than return. In fact nearly every bubble that one can think of had the roots of its demise anchored in the abuse of risk principles surrounding undue leverage. Yes, easy money helped create this condition, but the lack of common sense by both traders, bankers, and management exacerbated it to intolerable levels.

The unwinding that we are experiencing currently is already very painful and is likely to take a long, long time. But what happens to the system after this unwind? And what role will leverage play in the future financial sector? And how does this changing world affect valuations of even the more sound institutions left standing? Can the Goldmans, Merrills and Morgan Stanleys of the world make anywhere near the money in the next few years in such a de-levered environment, even in better economic times?

Obviously, these questions remain to be answered. But one thing seems certain. Risk tolerances have been diminished for investors, investment bankers and traders for the foreseeable future and the days of excessive leverage are over for now. Financial institutions will also be far more closely monitored and regulated as well. One likely change will be that better long-term investment ideas will once again dominate the Wall Street product cycle, as opposed to a flood of untested model-based new instruments Strength of investment ideas will once again dominate the sheep- following mentality that has led us into our current awful financial crisis.

It would be best if our memories of this condition and pain will stay with us for a long time. But The Street has a history of short term memories and repetitive patterns with regard to disasters. Leverage itself is necessary for the success of financial markets, but its abuse can lead to disastrous consequences. Let’s hope that these lessons are not forgotten anytime soon.

The views expressed in this column do not necessarily reflect the views of Channel Capital Group. Inc.