Comment: I don't find this makes

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I don't find this makes

I don't find this makes sense. It sounds like a real artificial and arbitrary distinction to say that the credit was somehow separate from the rest of the "real economy." Don't you think so?

Not if you consider that we have two sources of credit creation in this country: the Fed and individual banks. The Fed creates credit by buying Treasuries - this is their main tool for easing a credit crisis, as the Treasury value is now available for banks to borrow from the Fed. The banks create credit by applying multipliers to deposits factored with fractional reserve banking regulations. The kicker is the definition of "deposits" - this is technically a "liability", and a lot of things are classified as "liabilities" these days. Most of the credit crisis is centered around inter-bank lending; since nobody knows the value of these liabilities, Bank B can't say for certain that Bank A is capable of paying a loan back, so Bank A seizes; that seizing effect is why other industries have had credit issues (if Bank A can't get a loan, it's not going to be doing any loaning). The whole point of the first bailout was to offset the first round of mark-to-market valuation for those questionable liabilities by offloading said liabilities onto the Fed balance sheet; the Fed isn't just too big to fail - it gets to define what "failure" is.

But, I do think perhaps I could have been clearer. The effects are certainly being felt by the rest of the economy even if the initial credit contraction was confined to a single industry, especially when that industry is the lubrication of the overall economic machine. My apologies.