The Lingering Puzzles of the Global Credit Crunch, or an Essay on the Liquidity Illusion

A. Nesvetailova

Voprosy Ekonomiki, 2010, issue 12

Abstract: As lessons from the global financial crisis of 2007-2009 are being drawn, some rather uncomfortable questions about the political economy of the global credit crunch continue to linger. The most worrying of these include the presence of fraud and illicit practices at many levels of the financial practice during the credit boom, and the fact that a series of whistleblowers and warning signs of the coming crisis had been ignored on a systematic basis. Analyzing the evidence, the paper suggests that it is a pervasive illusion of wealth-creating capacity of the financial markets that explains the key causes of the credit crisis. This phenomenon can be understood as illusion of liquidity. Developing a theoretical framework for understanding this phenomenon, the author argues that it was the illusion of liquidity that helped conceal not only the true magnitude of risks in the system, but most controversially, the mounting signs of the coming meltdown.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:nos:voprec:y:2010:id:1106

DOI: 10.32609/0042-8736-2010-12-33-58

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