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 … Continue reading How bailouts harm credit creation