Timing the End of the Liquidity Crisis
By Arnold Kling
By the time the three years is up, a lot of these institutions will have been nationalized, if only de facto.
He offers this as one possible scenario for resolving the liquidity issues of European banks. (Bear in mind that I am leaving off the scare quotes when I talk about “liquidity” crisis.)
Here at home, does not the Fed balance sheet still include a lot of mortgage-backed securities? They were thought to be “illiquid” in 2008, but Bernanke and others thought that their “hold-to-maturity value” was well above their temporarily-depressed market value. I’m guessing that the market has not yet priced the securities to Bernanke’s hold-to-maturity value.
Every week, it seems, a mainstream economist comes out with a new paper explaining how asset prices can be temporarily depressed in a liquidity crisis. (Recall that was the theme of the first three papers in the latest AER.) What I want to ask is whether the financial-panic story has a sell-by date. If central banks have to keep propping up a market for five years, is a theoretical model of temporary mis-pricing of assets due to asymmetric information and bad market dynamics still the best explanation?
I am assured that these papers are not simply rationalizations ex post for bailouts. They provide additional testable hypotheses and policy recommendations. Do any of them make predictions about how long the central bank must intervene before the liquidity crisis ends?