Sound financial investment is important to individuals, to firms, and to society as a whole. By definition, investment is forward looking, and thus our future financial well-being is shaped by the soundness of the investment decisions we make today. History shows that sound investment requires confidence, and one of the key elements that underpin confidence is liquidity.
Indeed, Governor Kevin Warsh of the Federal Reserve Board says that liquidity, is, in fact, a form of confidence. 1 The events that ensued from the U.S. subprime-mortgage crisis have tested the confidence of many investors, and raised questions about where all the liquidity – which seemed so plentiful a few months ago – has gone.