Private liquidity is highly endogenous
February 9, 2012
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It is official: According to Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
In normal times, private liquidity dominates official liquidity. But private liquidity is highly pro-cyclical
and highly endogenous to the conditions that prevail in the global financial system.
The inherent endogeneity of private liquidity means that it can easily evaporate in times of
This is something Hyman Minsky noted a long time ago, but it’s nice to see the ECB now endorsing his views.
However, Mr. Coeuré doesn’t quite follow through in this dinner speech from the recent ECB – BIS conference on Global liquidity, as he explains the crisis with “excessive sovereign borrowing”, “gaps in regulation and supervision” and “insufficient fiscal discipline”. Nothing there about excessive bank lending or rehypotecation in the shadow banking system. But at least the belated insight that private credit is endogenous is something.