Discussion of The Unfolding Turmoil of 2007–2008: Lessons and Responses

The paper by Ben Cohen and Eli Remolona provides an excellent summary of the origins of the crisis. I agree with their emphasis on three key factors. There was: (a) fi nancial innovation – with exceptional opacity of new instruments; (b) low interest rates globally, which prompted a search for yield; and (c) an environment of ‘ravenous’ risk appetites driven by problematic incentives in various guises. The authors state that as credit risk problems became apparent, they transformed into a liquidity event, leading to what they claim to be the unique depth and duration of this crisis. The key to this is the interaction between market liquidity and funding liquidity in the context of maturity mismatch, with the potential for multiple adverse liquidity spirals as laid out by Brunnermeier (forthcoming).