Liquidity and the making of unconventional monetary policy

This research project addresses the role of liquidity in the making of this unconventional monetary policy in the United States and the United Kingdom. While liquidity problems were mentioned frequently following the crisis, there remains very little agreement about what the concept actually means. Instead, we often encounter liquidity only as a metaphor: for example, we are told that during the crisis, markets that were previously 'awash with liquidity' suddenly 'dried up'. But how exactly do policymakers make sense of the policy challenges associated with liquidity if the concept itself remains so elusive?
Liquidity typically describes the convertibility of an asset into a form of money. Yet the term remains conceptually ambiguous because it encompasses both the 'money-ness' of individual assets, and a state of financial markets more generally in which such assets can be exchanged. Liquidity is never inherent in any asset but always rests on the speculative confidence that the financial community as a whole places in the continued 'money-ness' of financial assets (Orléan 2014). Conversely, liquidity evaporates when economic actors lose confidence in the ability of economic models to accurately forecast future movements in risk and value (Colander et al. 2009; Bryan and Rafferty 2013; Davidson 2010). Every financial crisis is therefore also a crisis of valuation. The financial crisis of 2008 has been a powerful reminder of this. To avoid a total financial meltdown, it then becomes the responsibility of the state to assume hitherto unconventional powers in the attempt to restore confidence in the internal cohesion of the market's valuation regime (Mehrling 2011).
I suggest that making sense of liquidity is a highly political process: it always legitimates specific courses of actions and economic discourses at the expense of others (cf. Admati and Hellwig 2013; Langley 2014). Until now, there has been very little research on how policymakers draw on different ideas of liquidity in their attempt to make sense of the policy challenges at hand. Building on recent studies of the micro-dynamics of sensemaking and narration that shape the communicative strategies of central banks (e.g. Abolafia 2010; Abolafia and Hatmaker 2013; Braun 2015; Fligstein et al. 2014; Holmes 2016), I seek to critically analyse how the relationship between liquidity and monetary policy has been recast in the imagination of central bank researchers and policymakers since the financial crisis, and has legitimated a specific set of political responses.
The aim of this project is therefore to provide a genealogy of liquidity. Drawing on the methodological framework of pragmatist sociology, I emphasise that, historically, multiple and fragmented meanings have been attached to the concept of liquidity. A genealogy offers the possibility to create a better understanding of how different approaches to liquidity have always co-existed and underpinned very different ideas about the relationship between the state and the market. Based on this approach, I ask specifically how researchers and policymakers at the Federal Reserve have (re)interpreted their relationship to liquidity during and after the financial crisis of 2008. By focusing on the imaginary dimension of crisis - i.e. how different interpretative practices feed the diagnosis and negotiation of crisis and post-crisis episodes - I ask how different historical judgements and critiques of liquidity are struggled over and incorporated into a coherent narrative of (unconventional) monetary policymaking.
In order to achieve these research goals, I will need to conduct interviews with relevant policymakers in London and New York. Overseas fieldwork in the form of archival work at the Federal Reserve in New York and at the Bank for International Settlements in Basel will also be necessary.