E Pluribus Unum

OK, maybe a credit squeeze, not "a panic," at least not in the historical sense. One hundred years ago, a panic in the markets could happen if some event triggered a loss of confidence to the point where investors would pull their money out of banks and all financial activity would grind to a halt. Businesses, unable to get credit, would fail and people would be thrown out of their jobs. Usually some individual would step in and inject enough capital (i.e., "liquidity") into the market to jump start it again. I'm simplifying, but not by much.

In 1913, after one too many panics, the US created the Federal Reserve to serve, in part, as that entity that would inject capital into the market. Yesterday, the Feds injected $24 billion into the markets; the European banks injected another $130 billion. That is a lot of liquidity. Is it enough to calm the markets? You're asking the wrong guy. I do know that before the markets open on Friday morning, investors will have to digest the meaning of the overnight plummet of the markets in Asia.

None of this addresses why the markets are so shaken; nor does it address specifically what they're doing about it. Chief among the strategies is the desire to dump dollar-based investments like loans to the US government. If that happens on a large scale, we could be in for a rough time indeed because the dollar could rapidly become worthless. In a global economy that's really bad news -- and not just for the US.

What can you do about it? Don't borrow money -- and keep some cash stuffed under your mattress. Oh, I guess you could buy gold coins or something, but I'm not sure we've gone that far over the cliff just yet.

UPDATE: The Fed pushed another $35 billion in liquidity into the system Friday morning, on top of the $24 billion from Thursday. And it said that it would provide "reserves as necessary" to calm the markets.

UPDATE: Oh, and Krugman weighs in. He's pretty queasy.