The private sector then distributes the reserves around the markets – across counterparties, maturities, and degrees of creditworthiness. The resulting transactions enhance market liquidity and allow private market participants to allocate credit and determine the appropriate compensation for taking risk. However, this private-sector intermediation process in money markets became severely impaired in the recent turmoil.
As I already mentioned, uncertainty about the value of assets, about the creditworthiness of counterparties, and about future calls on the liquidity and capital of important market participants caused liquidity to dry up in many segments of the money markets.