September 24, 2008
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.