In Germany, banks earn close to nothing on the hundreds of billions of euros of excess liquidity that they have deposited at the ECB.

The fact that there is even a small liquidity crunch for banks implies larger liquidity crunches for less intensively regulated financial institutions, and even greater liquidity crunches for manufacturing and real estate companies.

When banks stopped providing short term liquidity to other banks and industrial companies, central banks filled the gap.

So, central banks must set the price of liquidity in the market day in and day out.

First, central banks suspended the rules of the free market in liquidity squeezes.

Some say that banks are inherently special, because they allocate society s savings and create liquidity.

The European Central Bank has provided a great deal of emergency liquidity funding to banks, which they use to buy even more government debt.

Thus, when volatility spikes and liquidity dries up, those same banks scramble for dollars.

Banks lend to banks, so while some are more illiquid than others, they are all intrinsically illiquid institutions.

Company cash is not the only source of considerable spending power waiting on the sidelines.

Restoring financial market confidence has had to rely on liquidity injections by major central banks.

Central banks in both advanced and emerging economies have provided massive injections of liquidity.

For example, we know that we should lower interest rates and inject liquidity to fight stagnation, and that we should raise policy rates and banks cash reserve ratios to stifle inflation.

Banks would then find it advantageous to hold their surplus liquidity in the form of T bills as long as these bills yielded more than bank deposits held at the ECB.

The answer is simple Central banks have turned on their liquidity hoses again, providing a boost to risky assets.

There is little chance that banks will re lend to these non banks the funds they borrowed from central banks, given these banks own severe liquidity problems and mistrust of non bank counterparties.

Indeed, the Fed regulates only banks, so liquidity and leverage will migrate to the shadow banking system if banks are regulated more tightly.

For, even as the central banking authority administered the price of liquidity, the price of risk was left to the tender mercies of the market.

These loans extend far beyond providing the liquidity that these countries need for internal circulation, for which a maximum of 335 billion their available stock of central bank money would have sufficed.

The quantity of liquidity in the world economy is surprising, and monetary expansion by central banks does not explain it completely.

The bond channel doesn t work when bond yields are already low and the credit channel doesn t work when banks hoard liquidity and velocity collapses.

The more the bank gives on liquidity, the less the politicians will do on reform.

The G 7 action plan aims to restore the flow of credit by securing interbank lending, and coordinated central bank actions have provided unprecedented levels of liquidity to the market.

They stepped beyond their mandates to provide quick financial support to investment banks, mostly by supplying private banks with liquid instruments in exchange for longer term and less liquid assets.

Like banks, all these financial institutions are subject to liquidity or rollover risk the risk of going belly up if their creditors do not rollover their short term credit lines.

But the reasons behind China s massive liquidity growth and the most effective strategy for controlling it are less obvious.

A massive liquidity injection by the government ensured that no major bank collapsed, and minor bank failures were administered in a surprisingly orderly fashion.

Like banks, all these financial institutions are subject to liquidity or rollover risk the risk of going belly up if their creditors do not rollover their short term credit lines. But, unlike banks, they do not have the safety net implied by central banks role as lender of last resort.

Banks on the list must keep higher reserves, and maintain more liquidity, reflecting their status as systemically important institutions.

The reason is simple while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves.

Coercive restructuring of insolvent banks unsecured debt would be next.

The Fed has given ordinary banks direct access to its credit facilities, and the ECB no longer rations the supply of base money, instead providing as much liquidity as banks demand.

DAVOS The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states.

The effort to maintain the dollar renminbi exchange rate at a level approved by China s State Council has already led to an enormous increase in the Chinese economy s financial liquidity.

Absolutely not. The provision of liquidity, the recapitalization of banks, more uniform deposit insurance across the advanced countries these were all correct and necessary measures.

Even the periphery of the eurozone is benefiting from the wall of liquidity unleashed by the Fed, the Bank of Japan, and other major central banks.

Countries cannot run out of liquidity, because the ECB can always provide more cash.

Consider a bank with liabilities of 1 billion.

Anticipating such liquidity insurance, banks can make illiquid long term loans or hold other illiquid financial assets.

Banks capital adequacy ratios were set globally, and, once set, remained fixed.

Those increased deposits at commercial banks were, by definition, an increase in the relevant stock of money.

In the early to mid 1990 s, rates were kept low because of banks real estate problems.

An important role of central banks is to provide cash to potentially insolvent banks in times of panic, when all other sources of capital dry up.

The breakdown was fundamentally a liquidity crisis, and liquidity was easily restored in several ways the New York banks issued their own liquidity through a clearing house one massively powerful financial institution, J.P. Morgan, bought up collapsing shares, and thus reversed a market panic and a scramble for liquidity and European central banks supplied gold to the American market.

Suddenly, as today, even big banks did not trust each other.