Using the hydraulic metaphor, we can say a negative shock occurred with wider bandwidth than the economy could process. The result we got was that sharp inversion in the curve, due to backlash, prior to the crash. However, in the hydraulic model, remember, with reversibility there is a negative spectrum in the yield curve. And that curve inversion on the positive end would have been matched by a peak at the negative end (the end hidden by asymmetric information). We had a unexpected reversal of financial flow, the system backed up when the shock happened faster than finance could adapt.
Read Brad's latest essay on the crash and he talks about financial intermediaries getting stuck with an inventory of MBS chunks when demand for them dries up. What happens is that prior to the crash, those MBS chunks were properly sized for the expanded financial market. After the crash and contraction, the the effective terms in the yield curve were different, and there was a frequency/quanta mismatch; in other words, there was no market with the proper inventory cycle to match the existing inventory, and MBS has to be repackaged.
I think the demand for safety should properly be modeled as a demand for term matching between finance and the real economy. Investors are not looking for safety along the Treasury curve, they are looking for Treasury and the real economy to get back in sync.
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