ARE GOVERNMENT OBLIGATIONS THE ONLY PROTECTION IN A LIQUIDITY CRUNCH?

ARE GOVERNMENT OBLIGATIONS THE ONLY PROTECTION IN A LIQUIDITY CRUNCH? In the article by Paul Davies that I linked to yesterday, he had an important quote from Hyman Minsky. Minsky, who wrote about how bubbles and financial crises develop, has been receiving a lot of attention recently because recent events make him look far-sighted. In particular, kids, there are a lot of references now to a “Minsky Moment”, which is defined as “the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments.” All this is to say that this quotation of Minsky by Paul Davies deserves attention: “the liquidity of the community decreases when government debt is replaced by private debt in the portfolios of commercial banks.” Government debt is different. In a liquidity crisis, only government obligations—such as cash or Treasury bills—will do. I suppose you could think of the guaranties the government has been issuing as converting private debt into government debt.