Edited by Jan Toporowski and Jo Michell
Chapter 28: Liquidity
‘Liquidity’ has always been central to the operation of any economy, often being referred to as the lifeblood of the financial system. At the same time, it remains one of the least understood concepts of modern finance. The elusive nature of liquidity was highlighted by the global financial crisis of 2007–09. Indeed, a paradox of the crisis was the sudden and fatal disappearance of ‘liquidity’ from markets and institutions, which only days before had apparently suffered from what Ben Bernanke dubbed a ‘global liquidity glut’ (Bernanke, 2005). Unsurprisingly perhaps, liquidity has been likened to the ‘dark matter’ or an ‘Achilles’ heel’ of contemporary finance. How come then, that ‘liquidity’ is at once a lifeblood and a dark matter of the financial system? Why does the idea of liquidity prove to be such an elusive notion? This chapter addresses these questions, drawing on contemporary studies of market liquidity and on historical inter-disciplinary theorizations of the nature of liquidity.
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