The great liquidity illusion ... and how regulators can make sure it never happens again

The root cause of the recent credit crisis was a misplaced belief that liquidity in the global financial markets was abundant, argues Anastasia Nesvetailova. This misconception enabled a localised crisis in the US subprime mortgage market to leach into the wider financial system. So what can regulators do to prevent such a situation from recurring?

Neil Kinnock, former leader of the UK's Labour Party, once advised his colleagues: "If you find yourself in a hole, stop digging." Although he was speaking about party politics, his words could not be more appropriate in the midst of the current financial crisis.

The global financial system has dug itself into a hole; and if left to its own devices, it will continue digging unless stopped.

Faced with the tangible danger of a global financial recession and even depression, the world's finance

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