My view is that a diffuse financial system – one with a diverse range of institutions of varying size and complexity – is preferable to a system that is highly concentrated. In fact, the need for diversification is one of the great lessons of the crisis.
While trading volumes remained robust, bid-ask spreads widened dramatically, particularly for older off-the-run Treasuries, but this soon spilled over into the more liquid on-the-run segment of the market, as well as the futures markets.3 The intense and widespread selling pressures appear to have overwhelmed dealers’ capacity or willingness to absorb and intermediate Treasury securities.4 In the end, the Federal Reserve took a number of steps to support smooth market functioning, which I will describe in a moment.