I very much agree with this sentiment of Mark Thoma’s:
There has been much debate about whether the financial crisis is driven
by lack of liquidity or from fears about lack of adequate capital and
solvency, but I’m starting to think a third component is important as
well, the complete breakdown of traditional information flows, and a
loss of confidence in the models used to evaluate that information.
Markets need information to work properly, and the information
financial markets need is not available.
Here is more. I do not wish to suggest that we abolish currency and T-Bills, but the deeper (and less stable) the private demand for these assets the harder it is to generate socially useful information from the trade in other assets. Maybe today we’re in a world where the 1980 Grossman-Stiglitz paradox of information partly holds. It’s not that the status quo price is already efficient, but rather no one gathering information feels they could benefit from swapping with the noise traders and so in turn not enough information is gathered.