In this case, markets may appear to function smoothly, but the risk-based pricing that lies at the heart of how financial markets efficiently allocate capital is impaired. The gloss of confidence may cause a misallocation of resources, and investors and financial intermediaries can be sidelined for a time, undermining the normal functioning of market operations.
Conclusion Some months ago, I asked, "What happens when liquidity falters?" 8 Highlighting the risks of a liquidity shock at some indeterminate point in the future is easier than ascertaining the consequences with precision.