My letter from a few days ago was meant to put some perspective on a situation that Wall Street and K Street continually tries to shout down.

Last night the European Central Bank issued a statement promising plenty of liquidity to banks. The Fed arranged a very large $24 bln in repos this morning, trying to get fresh credit in the hands of banks to deal with their current commitments. Even the Bank of Canada issued the same statement.

But all this misses the problem. The theory is flawed. Central banks promising new credit to strapped banks only helps them with their current problems. It will not get new credit into a system that can't take anymore. Banks, given their situation, are reducing drastically their new commitments, as they should. Borrowers can't afford to borrow more.

Sooner or later the market will realize that this is a credit crunch. We have not seen a real credit crunch since 1973. Go back to your history books to witness what a credit crunch does to asset prices. Pure and simple, when the borrowing dries up, there is no "money" to buy assets.

This is a process that is likely to take years to correct. It will not be a pretty process as debt gets destroyed (foreclosures) until enough of these excesses get wiped away to start anew. It was all caused by too-easy credit for too long by a Central bank not willing to let the market itself handle the allocation of capital. It insisted on providing credit cheaply when the market didn't deserve it.

So U.S. consumers have lived beyond their means for too long. They have wasted away their savings and are now in too much debt. Pure and simple.