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- W3196500367 abstract "The current financial crisis involved a liquidity crisis. Liquid assets are those which can readily be converted into money and hence easily priced by the market. Moreover, the use of market price as the measure of value seems selfevidently appropriate. Liquid assets have money-like qualities, and on the asset side of a firm’s balance sheet are considered closest to ready money. However, during 2008 many previously liquid assets became illiquid. Financial commodities that were formerly easy to sell became hard to sell, and their value was not so obvious to anyone. Even financial derivatives (like credit default swaps) whose ostensible purpose was to manage risk suddenly seemed too risky. Thus, many things that were formerly very close to money could no longer be exchanged for money. This caused serious problems for solvent but illiquid financial institutions and generated an interesting controversy about the true ‘worth’ of formerly liquid assets. The necessity of ‘mark-to-market’ accounting, for example, was heavily contested by banks reluctant to write-down the value of their assets. Problems within the subprime mortgage market affected overleveraged financial institutions, but more generally, illiquidity and uncertainty about value in financial markets ramified throughout the US and global economies, and triggered a serious economic downturn from which the world has not yet recovered (Brunnermeier 2009). In this chapter, I explore the institutional foundations for liquidity and consider how these have been affected in the current crisis. Previously (Carruthers and Stinchcombe 1999) I stressed the importance of knowledge among market actors for the creation of liquidity: in order to be liquid the commodities being bought and sold must be ‘knowable’ to buyers and sellers. They must feel confident that they understand the quality and quantity of the items to be transacted, along whatever dimensions are relevant. Markets can be undermined by either asymmetries of information (the classic ‘market for lemons’ problem) or symmetries of ignorance (where no-one knows what is going on). This holds true whether the commodities are tangible (e.g. wheat and textiles) or intangible (wheat futures contracts, claims on a future income stream). Simplification along a small number of dimensions is one way to create cognitive tractability. In other words, standardized commodities are easier to know. Cognitive tractability can also be achieved through the translation of new financial commodities (e.g." @default.
- W3196500367 created "2021-09-13" @default.
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- W3196500367 date "2012-03-12" @default.
- W3196500367 modified "2023-09-23" @default.
- W3196500367 title "Money, liquidity and price: Bruce G. Carruthers" @default.
- W3196500367 doi "https://doi.org/10.4324/9780203830123-15" @default.
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