We must now face squarely the question of the meaning of liquidity. There are no liquid assets aside from money, unless there is a central bank. In the discussions of liquid assets, it is significant that cash, bank deposits, and government securities are the only things ordinarily considered. Other securities and commodities are not added in when statistical estimates are made. Possibly this is a recognition of the painful truth learned in frequent panics under a national banking system that only a central bank can create liquidity. ... The liquidity of things which may not be absorbed by the central bank is a fair-weather phenomenon. Nonetheless, this fair-weather liquidity is a matter of significance and requires consideration. To the extent that liquidity preference is satisfied in periods of calm by assets that prove to be illiquid in periods of stress, the system is rendered more unstable.

... [Few] appreciate the profound changes wrought on the U.S. economy and financial system over the past few years of excess. Since March of 1998, total annual income has increased 18%..., while personal consumption expenditures have surged 22%. And while American households were saving at a positive annualized rate of $286 billion during the first quarter of 1998, unprecedented borrowing and over consumption have since left savings in historic collapse. ... Little wonder credit excesses are having reduced economic impact.

Today, the money and capital markets have come to dominate the money and credit creation process, with non-bank financial intermediaries at the heart of the U.S. Credit Bubble. ... Specifically, an historic monetary expansion ("multiplication") has created money market fund deposits in excess of $2 trillion. [Multiplication occurs because the borrower can lend the money to someone else, who can lend it to ....] ... As long as confidence holds, credit in the form of money has virtually unlimited potential for expansion.