LIQUIDITY NEWS. KEVIN WARSH: PRIVATE & PUBLIC LIQUIDITY
[Latest Endogenous Liquidity Index: -60.1%; Latest Global Dollar Liquidity measure: +37.7%]
"Public liquidity is an imperfect substitute for private liquidity", says Fed Governor Kevin Warsh. (When it comes to liquidity issues, Mr. Warsh is one of the Fed's most eloquent speakers -- see his well-crafted March 2007 speech on "Martket Liquidity: Definitions and Implications"). But what does he really mean? If I understand him correctly, Mr. Warsh points to excessive central bank liquidity (in the past) as the key culprit of the current mess:
More consequentially, we should recognize that Fed-supplied liquidity is a poor substitute for private-sector-supplied liquidity. When liquidity flows among private-sector participants, the players can more judiciously assess risk and reward, more adroitly learn from the recent turmoil to strengthen the resiliency of credit intermediation, and more ably allocate capital to its most productive uses in the real economy. Moreover, Fed-provided liquidity should not be mistaken for capital.
I take Mr. Warsh's words as an endorsement of the usefulness of my very own ... Endogenous Liquidity Index!