In today's volatile market, liquidity has become a kind of financial Tamiflu -- perceived as a cure for severe cases of Lehman syndrome and a panacea for all types of potential market maladies. But far from being a case of hypochondria, the yearning for liquidity is an understandable reaction to the financial crisis and today's market conditions.
Back in 2007, banks and hedge funds were gorging themselves on illiquid credit derivatives that made it difficult for them to analyse their risk or even to understand the market value of their holdings. The response has been a shift to the opposite extreme traders now want to know their exact positions constantly and want the reassurance of...