Reply #7: If you are really interested, there is a good essay [View All]

To understand the accelerating financial crisis that is afflicting various global markets you have to realize there are two credit creation processes at work in the world today. The first is the traditional one run by the central banks through the commercial banking system. This process has increasingly been shunt aside in the past ten years by a new credit creation mechanism run by the Wall Street investment banks. It is this new lending machine which is now imploding, and which threatens to impose severe economic pain.

There were warning signs from the Federal Reserve itself that this parallel universe of credit creation was running out of control. About a year ago the Fed announced it was no longer publishing its M3 money supply statistic. This seemingly obscure technical matter was actually very revealing. M3 is the broadest measure of money supply and includes corporate and investment bank money stock, as opposed to M1 and M2 which focus on cash and consumer credit. The Fed was implicitly saying it no longer had control over the credit being created through the investment banks, hedge funds, and various securities markets – and that it was not going to be responsible for any problems that developed.