Working Paper: NBER ID: w15273
Authors: Gary B. Gorton; Andrew Metrick
Abstract: When "confidence" is lost, "liquidity dries up." We investigate the meaning of "confidence" and "liquidity" in the context of the current financial crisis. The financial crisis is a manifestation of an age-old problem with private money creation, banking panics. We explain this and provide some evidence with respect to the current crisis.
Keywords: liquidity; confidence; financial crisis; repo market; banking panics
JEL Codes: G00; G01; G14; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Loss of confidence in private money creation (E51) | Banking panics (F65) |
| Economic shocks (F69) | Loss of confidence (E32) |
| Loss of confidence (E32) | Adverse selection (D82) |
| Adverse selection (D82) | Liquidity issues (G33) |
| Repo haircuts (G21) | Decline in liquidity (G33) |
| Repo haircuts (G21) | Bank run on securitized banks (E44) |
| Bank run on securitized banks (E44) | Insolvency (G33) |
| Loss of confidence in bank debt (F65) | Increase in repo haircuts (G21) |
| Increase in repo haircuts (G21) | Liquidity crises (G01) |