Friday, March 16, 2007

. Financial Times. Mohamed El-Erian interview

The endless talk about "brimming reservoirs of liquitidy", "liquidity boom", "big and small liquidity" is getting a bit out of hand, I am afraid. The Economist was on to something when it wondered "whether the term [liquidity] has any real meaning". And now comes Mohamed El-Erian, the head of Harvard Management Company, who oversees more than $30 bn in assets. El-Erian coins yet a new term ― "Endogenous liquidity":

I think that if this were normal conditions, the Fed would be looking to cut rates. The economy is slowing. The housing market is under pressure. The corporate sector is not spending. However I think that policy makers are increasingly aware of the source of endogenous liquidity, the liquidity that the market itself creates. Private equity is a perfect example, where a dollar that comes out of the public market, becomes $4 or $5 when it goes back in, through the private equity mechanism. So, I think that policy makers will wait for unambiguous evidence that the economy is slowing, before they move, lest they contribute to excess liquidity.

Like it or not, this "liquidity madness" is here to stay. People are desperately looking for new paradigms in a world of globalized capital markets, where the only sure bet seems to be that measures of domestic liquidity are fast becoming irrelevant.

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