Solvency is the problem, not liquidity

Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

“It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue,” she adds.

Thus, the Fed plan to increase liquidity by lowering rates will help little, if at all. Not when lenders don’t trust the solvency of those who want to borrow.