dsilisk

Here's Why Trouble Is Brewing

Its not liquidity if the banks are holding it, hoping to make money off it. Its only liquidity if banks are using it to supply cash to the businesses and people who need capital. $576B in liquidity didn't disappear. $576B in money that these banks made up on paper disappeared. They never had this money to begin with. They "loaned" out money that didn't really exist based on a 10% reserve on their sheets, and when the risk of default rose, they "wrote off" the same money.

If you can magically "write off" money, then it makes sense that they had to magically "write on," or invent, these resources to begin with.

Also, we are suffering through this downturn mostly because we have TOO MUCH liquidity. Its instantaneous capital that puts poor people in million dollar houses, that funds businesses which aren't profitable, which makes people feel they don't have to save, so we end up with a negative national savings rate.

Liquidity didn't disappear. The bank's finances just got an injection of reality. Its about time.

Supply and demand. There is an oversupply of pretty much everything in this economy, including liquidity and volitility. Correction to market equilibrium is the appropriate course of action, as painful as that may be to investors.