A central bank must decide whether its provision of liquidity is a bridge – while information asymmetries are resolved and potential market participants return to the market – or whether it is a pier because there is a permanent impairment. To underscore the distinction, consider again three aspects of recent events.
First, before the current market turmoil, many investors relied on rating agencies for credit analysis about structured products, and this information was relatively inexpensive to obtain. The process of financial turbulence demonstrated that rating-agency judgments were not always reliable. Consequently, market participants are now relying more on their own credit analysis, thereby increasing the costs for investing in structured products considerably.