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A few weeks ago I noticed that several blogs and such were adamantly proposing that the Fed lower rates immediately by 50 bps. They said that the flight to safety -- to long-term government bonds -- had created a liquidity crisis.

I understand what a liquidity crisis is on a personal level and in a business, but I don't understand it in this case.

How did the massive flight to long-term bonds create a liquidity crisis?

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This is because in order for many business to stay liquid they often have to issue short term debt. Many financial firms need liquidity so much that they literally make loans that are for duration of only one day.

However, the more people invest their savings in bonds which are usually long term debt (most bonds have maturity over 5-10y), the less money is there available to borrow short term. That means that even profitable business that has healthy profit ratios could get itself into bankruptcy just because of not being able to get short term loan to cover some important immediate financial obligation.

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  • $\begingroup$ I could ask separately, but is there an established term for this preference for longer-term loans? $\endgroup$ – Fizz Mar 16 at 6:08
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    $\begingroup$ @Fizz in case of purchase of long term government bonds it would be flight to safety as OP mentioned. $\endgroup$ – 1muflon1 Mar 16 at 9:59
  • $\begingroup$ I think the term I was looking for was "unsophisticated saver" tough, i.e. the "little guys" who don't go out to lend their money directly to corporations (other than banks) etc. $\endgroup$ – Fizz Mar 19 at 17:56

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