> You're right, but I would put it somewhat differently. The specific
> market/institutional configuration that made default on a (relatively) small
> class of securities so disastrous was the existence of a parallel banking
> system for large firms and banks - the repo market - that used AAA-rated MBS
> *as money* under the false or unthinking assumption that the value of those
> securities' was as secure as that of Treasury bonds. When a particular type
> of asset depreciates unexpectedly, it makes a huge difference whether that
> asset had been regarded as a speculative investment or as a near-perfectly
> liquid form of payment. If it's the former, no problem, that's life. If it's
> the latter, it will cause an enormous panic.
Yeah well I would agree with all of that - the crucial point being that these instruments' dramatic loss of liquidity was more of a problem for the banks than the fall in the future revenue streams associated with them. I fully agree that the monetisation and sudden demonetisation of mortgages is the most interesting thing of the whole episode.
> It doesn't really make sense to say that a more transparent pricing
> mechanism for MBS would have averted the problem, because if market
> participants had thought such a mechanism was needed, they wouldn't have
> been using MBS as money in the first place. The whole point of choosing an
> asset to use as money is that you choose one whose value you don't need to
> devote any resources to determining. Setting up transparent pricing markets
> for an asset presupposes the need to gather costly information about that
> asset, which vitiates the whole point of using the asset as money. In just
> the same way, it doesn't make any sense to say 19th century bank runs could
> have been averted if small-town banks' loan portfolios and financial
> conditions had been more publicized and transparent. If they had been,
> nobody would have wanted to use those banks' checks and deposits as money,
> because they would always be afraid some savvier market actor would invest
> more in information-gathering in order to arbitrage the different risks of
> checks written on different banks and the less-informed actors - the local
> grocer who takes checks, for instance - would get screwed.
I also agree here - I wasn't trying to make the point that the actual crisis would have been averted under different insitutional arrangements, though it could have taken a different form. The financial system tends to stretch liquidity as far as it will go, and if it becomes more secure about one instrument or practice they will move on to another. I just wanted to emphasise that liquidity was a big part of the problem, which made it amenable to lender-of-last-resort intervention. And I think you're right that it was basically analogous to a bank run and therefore analogous to financial crises going back through capitalism's history.
I gave a seminar in 2008 comparing Marx, Keynes and Minsky on liquidity and drawing this parallel between 19th century bank runs and 20th-21st century market runs, 'All that is solid melts into liquidity': http://scandalum.wordpress.com/2009/11/01/all-that-is-solid-melts-into-liquidity-and-then-sometimes-freezes/
Mike Beggs