Since the month of August, economists have been trying to understand why something that was supposed to be positive for global growth, namely the diversification of risk through securitization, had turned out to be the source of the recent crisis. The first reaction was to characterize this as a liquidity crisis - some banks were having undue difficulties in securing funds in the interbank market, and thus central banks reacted by providing liquidity through open market operations. Many central bankers and academics started smiling with an "I told you so, there was so much excess liquidity, this was bound to happen", and adopted a tough anti-moral hazard stance. More than a month, and many billions of dollars of extra liquidity injections, later the situation in money and credit markets has not improved. Central banks have added liquidity to a situation of already "excess liquidity" to tackle an apparent liquidity crunch, and yet nothing has got better. Perhaps it was not about liquidity, after all.
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