Wednesday, June 29, 2011

Loss of liquidity could spark new financial crisis

CURRENCY MATTERS: John Kicklighter From: The Australian

WHAT was the real cause of the global financial crisis that climaxed in late 2008?

Many would point to losses on subprime mortgage-backed securities, but alone they wouldn't have led to such a big drop in capital markets and risk appetite. The real fuel to the fire was the withdrawal of liquidity and the forced liquidations that resulted. As the losses market participants were suffering through the downturn grew, lenders' confidence they would receive their capital back receded and those same banks needed the funds as well to cover their own losses. Eventually, without the money on hand to cover their immediate obligations, legacy companies such as Bear Stearns and Lehman Brothers would fail.

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