New York Fed On Shadow Banking
The chart below demonstrates vividly why any attempt to restart the securitization machine is doomed to fail.
Another interesting discussion is the consistent decline of leverage at primary dealers (see p.10).
And here is the Fed's prescient observations on leverage and liquidity:
Financial crises tend to be preceded by marked increases of leverage.
The fluctuations of credit in the context of secured lending expose the fallacy of the "lump of liquidity" in the financial system. The language of "liquidity" suggests a stock of available funding in the financial system which is redistributed as needed. However, when liquidity dries up, it disappears altogether rather than being re-allocated elsewhere. When haircuts rise, all balance sheets shrink in unison, resulting in a generalized decline in the willingness to lend. In this sense, liquidity should be understood in terms of the growth of balance sheets (i.e. as a flow), rather than as a stock.