The credit crisis has produced an avalanche of problems and also of explanations. Some observers have stressed that it is mainly a solvency crisis; others that it is mainly a liquidity crisis.

It is increasingly clear that it is both. Liquidity and solvency problems are so intertwined that trying to decide whether it is one or the other is counterproductive. When a hedge fund today is hit by a withdrawal (a liquidity problem) and is forced to sell assets, the price of its assets declines and a solvency problem is created. The liquidity and solvency problems of that hedge fund in turn are likely to lead other investors to withdraw (again a liquidity problem) leading to further price declines (solvency).