Liquidity for Real: Central Banks and the Social Mechanisms in Creating Liquid Markets

Market liquidity, which is sometimes defined as the capacity to buy and sell in large quantities with little impact on prevailing prices, sounds like an economic issue, but also has important sociological dimensions. According to sociologists such as Carruthers and Stinchcombe (1999), liquid financial markets require the standardisation of the items being traded and a degree of common knowledge of their properties, whereby specific social institutions are needed in order to make markets liquid. A similar argument has been made in the study by the sociologists Turco and Zuckermann (2014), who have argued that a liquid market environment is collectively constructed through institutions. Studying the private equity market in the run up to, and during, the Financial Crisis of 2007/08, they show that a distinct institutional design incentivised market participants to invest although they knew that prices were inflated. In this case, a somewhat non-liquid market turned fairly liquid and contributed to a bubble. In both studies, liquidity is a problem in the sociology of knowledge and institutions. Such a sociological view differs from a purely economic, or better, financial view, which "assumes liquidity in the overall market" (emphasis in original) (Mehrling 2000: 84) and rather takes liquidity for granted. In fact, what the financial crisis has shown is that liquidity can evaporate quickly, even in markets, which were assumed to be always liquid. Hence, what makes liquidity sociological interesting in contrast to an economic view is its relation to the Thomas theorem and the questions how men come to define market situations as liquid so that liquidity in its consequences become real.
Traditionally, the organisations involved in the creation of liquid markets have been from the private sector. Since the global Financial Crisis, however, public bodies - central banks - have provided important institutional foundations of market liquidity. Today, these emergency supports have translated into the promotion of a new central bank liquidity assistance consensus (CGFS 2017) and can be summarised as providing liquidity more rapidly and actively during a crisis.
Using the case of the new or expanded central bank liquidity support, this PhD project is a sociological analysis on how the post-crisis institutional linkages have altered the mechanisms of the creation, perception and effects of market liquidity and thereby the public knowledge of liquidity. In order to achieve this, the project will consist of (a) a historical socio-institutional-material account of the emergence of central bank liquidity support, which focuses on how technologies and the institutional design of central banks provide or influence the mechanisms to create liquidity. Based upon this vantage point, I will compare the liquidity support of the Bank of England with the European Central Bank. With the Bank of England as the oldest central bank, this comparison will allow to trace how the Bank of England became the pioneer in supporting liquidity and compare it to a less expansive liquidity support from a much younger institution, the European Central Bank. However, this project also takes insights from Bourdieu's field theory and problematizes (b) how, and with what success, do banks and other market participants seek to impose their interests on central banks? Accordingly, this PhD project sheds light on the forces behind these interventions, adding a critical dimension to this project in explaining modern capitalistic developments.