Chairman Greenspan described these episodes as an apparent collapse in investors’ understanding of possible future risks, despite what appeared to be mild imbalances, which led to “disengagement” by traders. 2 Therefore, I wish to advance a simple proposition: Liquidity is confidence. That is, powerful liquidity in the U.S. capital markets is evidenced when the economic outcomes are believed to be benign.
When the “tail” outcomes are either highly improbable or, at the very least, subject to reasonably precise measurement, the conditions are ripe for liquidity to be plentiful. When fund flows are strong and growing, there is little reason to expect trading positions to become inalienable.