3 Questions: Liquidity lessons
Economist Bengt Holmstrom has spent years studying how the behavior of firms interacts with larger economic currents. Now Holmstrom, the Paul A. Samuelson Professor of Economics at MIT, has a new book out analyzing the supply and demand of easily transferrable (or "liquid") assets for corporations, and the resulting implications this has for policy-makers. The work, Inside and Outside Liquidity (MIT Press), was co-authored with Jean Tirole, an economist at the Toulouse School of Economics in France. Q. We just went through a global banking crisis, in late 2008, where lending appeared to freeze up. What are the lessons we can learn by studying liquidity in its aftermath? A. One lesson from the crisis is that we don't understand the role of liquidity, the nature of systemic risk, and the efficient provision of insurance nearly as well as we thought we did. It is essential that we...