This is no liquidity problem; that implies we just need to generate more debt. Taking the bad debt away from banks and making taxpayers pay the bill does nothing but shift the burden from those that made the error to those that didn't. The bill will be paid regardless.

Stocks may gyrate wildly if and when our “wise” central bankers announce their final plans of ridding the banks’ of a small percentage of this bad debt. But unless the government nationalizes a significant portion of it (the end game that will significantly change the world, and not for the better I might add), it won’t do much for banks’ willingness to lend and it certainly will not make the consumer more worthy to borrow.

The world has had debt corrections before. Some we have hardly noticed as the market was allowed to correct imbalances fairly quickly. Others have created sustained periods of deflation and negative economic growth because the debt was allowed to grow too large. Unfortunately, the size and scale of the debt in our economy today (thanks to the derivative markets) I have described as perhaps the largest in history by any measure (100 ways).

As the same economists who never saw a recession coming in the first place and now see just a shallow recession, and as Meet the Press invites two young people from TV to explain economic conditions they really don’t understand, I thought I would share with you another opinion.

The following is from an old friend of mine who has been around for almost as long as I have and makes his living understanding these things. You won’t hear what he has to say from mainstream commentators:

“All roads lead to deflation, particularly acute in the current regime due to the degree of credit/debt expansion. Every measure being enacted by world central banks is to forestall/reverse any further credit-related broad-based asset contraction. This is very difficult, and very unlikely to succeed, for any reasonable length of time.

That is, as a shift in psychology has already occurred with respect to undertaking debt/credit expansion -- i.e. readily accessible liquidity is being used to shore-up balance sheets, to the degree possible; thus, any such measures to encourage risk-taking, are likely to have difficulty in overcoming this hurdle.

The significant shift that has occurred recently is the Fed, and by inference, other central banks, willingness to increasingly risk the viability of their respective balance sheets in order to influence a shift in risk preferences. A new broad-based asset bubble is unlikely as any 'pullback' in asset trajectories that such a central bank move attempts to create will almost certainly be met by asset liquidation, i.e. it's akin to being long a position well below the entry price -- it's a natural reaction to let ride any rallies as long as possible, but to reduce risk, when it appears any such rallies have run their course. This is the result of the shift in psychology.

So, overall, any initially positive equity-related reactions are likely to resolve in further downside, until such time a broad-based capitulation has occurred.”

That capitulation is a long way away in time and price. The U.S. is in for a long process of debt liquidation, and that means a shrinking GDP.