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We study the conditional distribution of GDP growth as a function of economic and financial conditions. Deteriorating financial conditions are associated with an increase in the conditional volatility and a decline in the conditional mean of GDP growth, leading the lower quantiles of GDP growth to vary with financial conditions and the upper quantiles to be stable over time. Upside risks to GDP growth are low in most periods while downside risks increase as financial conditions become tighter. We argue that amplification mechanisms in the financial sector generate the observed growth vulnerability dynamics. (JEL C53, E23, E27, E32, E44)

Financial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor (SDF) than that of a representative consumer. Guided by theory, we use shocks to the leverage of securities broker-dealers to construct an intermediary SDF. Intuitively, deteriorating funding conditions are associated with deleveraging and high marginal value of wealth. Our single-factor model prices size, book-to-market, momentum, and bond portfolios with an R 2 of 77% and an average annual pricing error of 1%-performing as well as standard multifactor benchmarks designed to price these assets.

Before the current financial crisis, the global economy was often described as being "awash with liquidity", meaning that the supply of credit was plentiful. The financial crisis has led to a drying up of this particular metaphor. Understanding the nature of liquidity in this sense leads us to the importance of financial intermediaries in a financial system built around capital markets, and the critical role played by monetary policy in regulating credit supply.An important background is the growing importance of the capital market in the supply of credit. Traditionally, banks were the dominant suppliers of credit, but their role has increasingly been supplanted by market-based institutions -especially those involved in the securitization process. For the US, Figure 1 compares total assets held by banks with the assets of securitization pools or at institutions that fund themselves mainly by issuing securities. By 2007Q2 (just before the current crisis), the assets of this latter group, the "market-based assets," were substantially larger than bank assets.

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