Serving the Quantitative Finance Community

 
User avatar
musicgold1
Topic Author
Posts: 1
Joined: March 25th, 2008, 3:40 pm

Question- injection of liquidity at times of crisis

August 25th, 2014, 4:07 pm

Hi,The following paragraph is from this article. The bold part is not clear to me. How would focusing on illiquid collateral would have removed the excess liquidity problem? Would someone please help me understand that?Central banks have not been doing the job of market maker of last resort effectively, indeed they have barely been doing it at all. Following the stock market collapse of 1987, the Russian default of 1998 and the tech bubble crash of 2001, all that the key monetary authorities have done is (1) lower the short risk-free interest rate and (2) provide vast amounts of liquidity against high-grade collateral only, and nothing against illiquid collateral. The result has been that the ?resolution? of each of these financial crises created massive amounts of high-grade excess liquidity that was not withdrawn when market order was restored and provided the fuel that would produce the next credit boom and bust . By focusing instead on illiquid collateral, it should have been possible to achieve the same effect with a much smaller injection of liquidity Thanks.
 
User avatar
DominicConnor
Posts: 41
Joined: July 14th, 2002, 3:00 am

Question- injection of liquidity at times of crisis

August 28th, 2014, 10:19 am

I think it's more the case that you work with the things you have easy access to, rather than what you'd like to affect directly.
 
User avatar
DavidJN
Posts: 242
Joined: July 14th, 2002, 3:00 am

Question- injection of liquidity at times of crisis

September 2nd, 2014, 12:10 pm

The US did focus on illiquid collateral as well. Have a look at the list of eligible collateral for federal reserve lending. That already long list expanded substantially during the rough spot. Indeed, there was a joke on the street that you could almost get a haircuted fed loan by proffering a piece of paper with the words "This is a bond" written on it!