As Keynes observed, there cannot be liquidity for the community as a whole. The mistake is in thinking that markets have a duty to stay liquid or that buyers will always be present to accommodate sellers. The real culprit in 1994 was leverage. If you aren't in debt, you can't go broke and can't be made to sell, in which case liquidity is irrelevant. But a leveraged firm may be forced to sell, lest fast-accumulating losses put it out of business. Leverage always gives rise to this same brutal dynamic, and its dangers cannot be stressed too often.
Roger Lowenstein's book highlights a critical observation from economist John Maynard Keynes regarding market liquidity, stating that it cannot be guaranteed for the entire community. The assumption that markets are obligated to remain liquid or that there will always be buyers available is fundamentally flawed. The real issue that arose in 1994 was the excessive use of leverage, which creates situations where companies, burdened with debt, may be forced to sell assets quickly to avoid insolvency.
This situation underscores the inherent dangers of leverage, as companies with high debt levels face intense pressure during downturns, leading to the potential for rapid losses. Without leverage, firms have the stability to weather financial storms, making liquidity concerns less relevant. Thus, Lowenstein emphasizes the need to recognize the brutal dynamics of leverage and the risks it introduces into the financial system.
