Nouriel Roubini: Beware the liquidity time bomb

Investment guru Nouriel Roubini sees another bust and collapse on the horizon.

Andrew Van Sickle
By
published
in Features

Nouriel Roubini was among the few economists to foresee the 2008 financial crisis. Now he's worried there will be another "bust and collapse". The seeds for the next crisis have been sown by the authorities' response to the last one.

While economies are swimming in liquidity, increasingly overheated markets, especially bonds, have too little of it. If markets are illiquid, buyers can't find sellers easily and vice versa, which implies big, sudden price movements if investors all rush in the same direction at once.

In stockmarkets, high-frequency traders (HFTs), who use computers to carry out short-term trades, account for a growing share of transactions. This creates "herding behaviour". They are most active at the beginning and end of the trading day, leaving fewer transactions, and less liquidity, in the middle. In bond markets, the dearth of liquidity is a result of new regulations.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

These have made it more expensive for banks to hold bonds, making them far more reluctant to act as buyers and sellers "market makers" and thus grease the market's wheels. Without banks acting "as a stabiliser", aselling stampede could cause violent price falls and widespread losses. Market illiquidity "is a time bomb".

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

Latest