Money Liquidity, Funding Liquidity,Transaction Liquidity and Financial Crisis

With money liquidity, transaction liquidity, funding liquidity and their interactions, this article analyzes the innovation of the sub-prime mortgage crisis and its transformation into the financial crisis. The findings show that as in other historical financial crises the overall liquidity meltdown is the direct cause. The default in sub-prime mortgage is just the fuse. Typically, as the money policy is getting tightened, money liquidity deteriorates, which will have great impact on transactions liquidity and then on funding liquidity. And the exacerbation of funding liquidity will lead transactions liquidity (and then money liquidity) to decline even further. Then the financial market appears less money liquidity, which again feeds back on transaction liquidity and funding liquidity. Such two positive feedback loops will eventually result in an overall liquidity meltdown.