My best guess based on these two measures involves changes in money market mutual funds (which are included in MZM). It's reasonable to expect that during recessions individuals will sell various financial assets and move funds into MMMFs, which are close substitutes for cash. On second thought, a similar argument could be made for normal demand deposits at banks. Overall I think it's just about individuals and businesses engaging in a flight to safety, where deposits or MMMFs are preferable to physical currency/notes.
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You are probably right. M2 shows the same. trends.Always finding new reasons to be skeptical of the stylized facts of the business cycle.
The stylized facts tend to be very dependent on how one defines certain economic terms, such as liquidity. I tend to think of "liquidity" in terms of the "moneyness" of different media of exchange. For example, private MBS were very liquid prior to the fall in housing prices, but became increasingly less liquid leading up to the financial crisis. So investors moved money towards more "liquid" media of exchange but that was not enough to offset the loss of "liquidity" occurring from holdings of commercial paper, repurchase agreements, ABS, MBS, etc. The Fed could/can only ensure liquidity in those markets if it's willing to accept substantial credit risk on behalf of the public.
If anybody could explain this, I assumed it was you Josh. Thanks.