Re-Leveraging, Not De-Leveraging
By Arnold Kling
The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more.
You should go to the post and read the graph. Pointer from Tyler Cowen.
The nonfinancial sector wants to issue risky long-term liabilities and to hold safe short-term assets. The financial sector accommodates this by doing the opposite. But sometimes the financial sector gets too big. The financial crisis was a signal that the financial sector needed to shrink.
It didn’t. Have a nice weekend.