Kevin M. Warsh on Market Liquidity
In a recent speech released by the BIS Kevin M Warsh from the Board of Governors of the US Federal Reserve System takes on the topic of liquidity, what it is, whether there is too much, finally the liquidity trend going forward. In his own words ...
Fund managers of private pools of capital seized upon this opportunity to acquire more-permanent sources of capital: extending lock-up periods; using retail platforms and co-investment funds to increase ‘stickiness’ of contributed capital; securing greater financing flexibility from prime brokers; accessing the private placement markets; and selling public shares of limited and general partnership interests to new investors; to name just a few.
Key questions remain: Is liquidity at strong and sustainable levels, justified by economic fundamentals? What is likely to be the liquidity trend going forward? In today’s remarks, I will first propose a definition of market liquidity based on what I believe is its most fundamental characteristic. I will then discuss the primary sources of liquidity in the U.S. capital markets, and attempt to interpret signals from financial asset prices in this environment. I will conclude by discussing implications for the economy and policymakers.
... and his conclusion:
In summary, liquidity has risen significantly, with important benefits to our financial system and economy. An important source of strength has been financial innovation, and while we have yet to see how some new products will play out in a more stressful environment, there almost certainly will remain a greater dispersion and insurability of risks. Stable output and price stability have also been important contributors to liquidity and investor confidence by helping to anchor views about longer-term economic outcomes. And solid fundamentals may help to ease any changes in liquidity should they occur. Hence, job number one for the Federal Open Market Committee is to choose a course for policy to best keep the macroeconomy on an even keel. This attention to our dual mandate – to maintain stable prices and maximum sustainable employment – supports investor confidence in the economy and the considerable benefits conferred by liquidity.
I think this is a well argued speech, especially as a short yet precise and concise overview of the topic of (excess) market liquidity.