The Language of the Credit Crisis

September 24, 2008

Welcome to a new category of postings on the Facing the Mortgage Crisis blog. The idea behind this series is to clearly explain what some of the names, terms, and words that keep popping up in the news mean. Lately, a lot of articles and interviews addressing issues that supposedly affect us all are using language that most of us don’t understand. Figuring out what these unfamiliar terms mean in everyday language has helped me make sense of what is going on, and hopefully can do the same for readers of this blog.

 

Liquidity:
This term is used in reference to a couple of things when talking about the credit crisis. One is the liquidity of firms. This refers to whether a firm has enough easily accessible assets (cash, for example) to meet its obligations. A basic example of this is if a whole bunch of people go to their neighborhood bank to withdraw money, does the bank have enough to give them all the money that the bank has been holding for them? If not, they are insufficiently liquid. The other way that the term liquidity is used is in reference to assets. In this case, liquidity means that an asset can be easily sold because a) its value is known, and b) there are ready buyers and sellers. Right now, sub-prime mortgages are said to be illiquid, because there is uncertainty as to what they are actually worth.