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The Dark Side of Liquidity

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Lord Byron once wrote that “ready money is Aladdin’s lamp.” And who can deny that liquidity—having enough ready cash to pay your debts when they come due—is a good thing? But even at a simple level, people recognize the sacrifices that must be made for liquidity and will often trade, for example, an extremely liquid nest egg for a quite illiquid house, and consider that they have gotten the better of the deal.

Lord Byron once wrote that “ready money is Aladdin’s lamp.” And who can deny that liquidity—having enough ready cash to pay your debts when they come due—is a good thing? But even at a simple level, people recognize the sacrifices that must be made for liquidity and will often trade, for example, an extremely liquid nest egg for a quite illiquid house, and consider that they have gotten the better of the deal.


Suggested citation: Haubrich, Joseph G., and João Cabral dos Santos, 1997. "The Dark Side of Liquidity," Federal Reserve Bank of Cleveland, Economic Commentary, 09.15.1997.

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