Exchange economies run on credit. While money is a form of credit, credit is far greater in extent than money.

There are many bad credits in the economy now because of the bubbles. Lenders always sort out good from bad credits. But with the Fed and Treasury interfering to support bad credits, the credit markets cannot sort the good from the bad. There is no transparency. Lenders cannot rely on their usual means of assessing the credit-worthiness of the borrowers. Lenders therefore stop lending and rush to safety in t-bills. The entire exchange economy then grinds to a halt. The bad credits need to be purged from the system.

The Fed and Treasury undermine the credit market by attempting to save it. They are providing their “credit”, which is not real credit built on trade and production for sale. They are not the market. They are paying $0.50 for a credit worth $0.05 or less. No one believes them when they say it will eventually be worth $1. Why should they? In the 2000 stock boom, Nortel Networks got to almost $900. It is now $1.57. It never recovered. That is only one stock. The bond markets and housing markets are larger than the stock markets.

Furthermore, the amounts the Fed can advance cannot cover all the bad credits which run into trillions and trillions. NT alone lost $225 billion in market value!

The Fed is mistaking what it calls liquidity that it is creating for true credit. This is based on a misunderstanding of how an economy creates real credit. The Fed cannot replace every market in the economy.