Title

The Case for a Market Liquidity Provider of Last Resort

Document Type

Article

Comments

The most up-to-date version of this piece can be found in the Duke Law Scholarship

Abstract

This short paper, prepared as a keynote address, explains why the credit crunch is fundamentally a story about financial markets, not banks. Its cause was a collapse of securitization and other debt markets, which have become major sources of financing for consumers and companies. Deprived of this financing, consumers have had difficulty purchasing homes and automobiles, and companies have had difficulty purchasing inventory and making capital investments, causing the real economy to shrink. This paper examines how these financial markets should be protected. Although already subject to many prescriptive regulatory protections, these markets evolve faster than regulation can adapt. The paper argues that a market liquidity provider of last resort is the most robust and cost-effective way to protect these financial markets when prescriptive regulation inevitably fails.

Date of Authorship for this Version

2-2009

Keywords

financial markets, financial regulation structure, disintermediation, market liquidity