“Since the above channels are well known, I would like to focus today on a more novel set of potential financial stress amplification channels, related to some NBFIs’ heavy reliance on leverage and (on- and off-balance sheet) short-term dollar funding.”
The liquidity backdrop (and perceptions of prospective liquidity) turns increasingly prone to abrupt shifts. Liquidity over-abundance can quickly transition to waning liquidity. And once market perceptions begin to adjust to a deteriorating liquidity backdrop, the marketplace turns acutely vulnerable to the forces of heightened risk aversion, deleveraging, illiquidity, and market dislocation. This process has begun.
A strong case can be made that we’ve witnessed the heyday in global speculative Bubble excess and resulting liquidity overabundance. Importantly, this liquidity onslaught has masked major festering problems – at home and abroad.