When, on 15 September 2008, Lehman Brothers filed for bankruptcy, the turmoil that had started a year earlier turned into an avalanche. The system moved into a chaotic state, mathematically and metaphorically. The crash In times of financial panic, banks and other financial intermediaries have an instinct to change the composition of their assets. They shed risky and illiquid investments and rush to liquidity.
In the process, banks’ intermediation is reduced, and loans to companies are curtailed. If the process is let unfold in a disorderly manner, it can create severe damage for borrowers and for the broader economy. After the demise of Lehman, liquidity hoarding was so intense that we feared bank intermediation would suffer a complete and lasting collapse.