Over time, these markets became – like traditional commercial banks – an important locus of maturity transformation, which in turn led to both an expansion and alteration of traditional money markets. Ultimately, there was a vast increase in the creation of so-called cash equivalent instruments, which were supposedly safe, short-term, and liquid.
When, in 2007, questions arose about the quality of some of the assets on which this intermediation system was based – notably, those tied to poorly underwritten subprime mortgages – a classic adverse feedback loop ensued. Investors formerly willing to lend against almost any asset on a short-term, secured basis were suddenly unwilling to lend against a wide range of assets.