Federal Reserve Bank of Boston President Eric Rosengren warned yesterday of an unprecedented “liquidity lock” that’s preventing short-term loans and shattering old assumptions about basic economics.
Rosengren, speaking in Wisconsin, made clear the nation’s financial system has entered uncharted territory due to a “new and unwelcome wrinkle” that basically boils down to “extreme risk aversion” among institutions to loan even short-term money.
He dubbed the phenomenon “liquidity lock.”
If the government can’t find the key to unlock liquidity, then the liquidity lock will have a far-reaching impact on the entire economy, he said.
“A liquidity lock makes it more difficult for financial firms and non-financial firms to raise the funds they need,” he said, emphasizing home equity, student and auto loans are all vulnerable.
Rosegren said “liquidity lock” is historic in nature.
“During the recent financial turmoil, some fundamental assumptions about the financial system have proven to be seriously flawed,” he said in a prepared statement.
He said the main flawed assumption was that large financial institutions, such as Wall Street investment banks, could handle massive redemptions demanded by nervous investors.
Trying not to come across as what he called an “alarmist,” Rosengren suggested that recent emergency actions by the U.S. Treasury and Federal Reserve are showing signs of working, as huge redemptions from money-market funds are slowing and some stability is being brought to credit markets.
By Jay Fitzgerald, Boston Herald General Economics Reporter. |
