The global financial crisis is also called a modern bank run which is what Krugman probably has in mind as transaction problems and the destructive scramble for cash.
Economist Hyman Minsky says every unit in the economy has a position in assets that are not liquid. To gain and keep legal control over this position the unit makes use of position-making instruments.
Hyman Minsky's Financial Instability Hypothesis and the Accounting Structure of the Economy:
https://www.degruyter.com/document/doi/10.1515/ael-2013-0045/html
Minsky defines his accounting representation of a “capitalist” economy under investigation. Accordingly, a capitalist economy structure comprises capital assets (employed to the pursuit of private incomes and wealth) and a financial system “that makes the indirect ownership of wealth possible” (1986, p. 78). In particular, financial instruments (be them short-term note, bond, deposit, insurance policy or share of stock) are used to “finance control over capital assets,” and involve a commitment to pay cash at some time or triggering event, generating indeed a “complex system of money in/money out transactions” (1986). Use of financial instruments implies that cash is needed to fulfill these commitments. According to Minsky, cash can be obtained: from funds in hand; payments from wages and profits; moneys generated by owned financial contracts; sales of physical and financial assets; borrowing; and creation of cash, the latter being the privilege of government, banks but also money market funds and various broker cash-management accounts (1986, pp. 78–79 and footnote 2).
Liabilities, the other side of a firm’s balance sheet, are commitments to make payments; the payments are dedicated to both repaying and servicing debt. Cash to meet these payment commitments can be obtained either from the gross profit cash flow, cash on hand, the sale of assets, or borrowing.
The balance sheet of a bank or nonbank financial intermediary can be described in general terms as follows:
Assets: cash + marketable securities + portfolio of financial assets
Liabilities & Equity: insured debt + uninsured debt + equity
Government debt is usually the highest quality or safest credit in the pools of marketable securities that banks and nonbanks hold in their liquidity cushion as position-making instruments. Therefore more safe assets improve liquidity and ease transactions especially as the remedy for a destructive scramble for cash.
When investors make a systemic run away from holding the uninsured debt of the banks and financial intermediaries then cash becomes scarce because it is generated by transactions via financial intermediaries which tend to grow the systemic balance sheet. In other words the liabilities and equity are position-making instruments for banks and nonbank financial firms in the lexicon of Hyman Minsky.
During a run away from unsecured investments Minsky says units are forced to "sell position to make position". This means the sale of portfolio assets to keep cash flow obligations to hold the remaining portfolio. When many units are selling position to make position it is called a "fire sale" and this unwinds the balance sheets of the financial sector via forced deleveraging by panicked investors holding their uninsured liabilities and equity. Equity will take the first loss on a fire sale of assets from portfolios so equity and uninsured debt placement both become scarce. When the aggregate financial sector is forced to deleverage or shrink balance sheets this disrupts the market transactions that make cash seem abundant rather than scarce.
Minsky says may units may be forced to "sell position to make position." This means those units cannot roll-over and grow liabilities due to lack of willing counter-parties and are forced to sell marketable securities and then sell portfolio holding out of their "position". So the global financial crisis has been called a Minsky moment because he describes the mechanism active in the destructive scramble for cash during a systemic crisis.
When a bank expands its asset portfolio this increases the money supply held as financial assets by the nonbank sector. When a bank or bank sector is forced to sell portfolio assets to the non-bank sector this reduces the money supply because banks create money (deposits) via balance sheet expansion and cancel money (deposits) when forced to sell financial assets to nonbanks. So a modern bank run can be seen not only as a destructive scramble for cash but ironically as a scramble for cash that destroys cash (deposits) via forced deleveraging of the bank sector.
