Could you explain the solvency/liquidity thing for me as I was a little confused.
"If you think its liquidity, then the Fed's doing what it should. If you think it's solvency, then there's not really any point in the Fed cutting rates".
Think of it like this:
Liquidity -- if you have lots of assets, say money in the bank, but not in your wallet, then you are illiquid but solvent, i.e. you could potetially pay for your meal, but don't have the cash (liquidity) to do so
right now.
Solvency -- the ability to meet long-term expenses. You might be liquid enough to be able to pay for your meal if, say, you'd just been loaned money from the Fed, but be fundamentally insolvent, i.e. skint and in piles of debt you can't pay back.
What's going on right now is referred to as a liquidity crises because everyone's getting nervous about their money -- they all want it back because no one trusts anyone else, seemingly because they're all a bunch of untrustworthy cunts. If banks are liquid enough (which is hard if everyone is doing this at the same time, because banks are all highly leveraged), then this is no problem, if not...
(This is a guess and an oversimplification, but seems correct) Bear Stearns' creditors wanted all their money back at the same time, and the bank wasn't liquid enough to achieve this, so it defaulted on its loans and everything went bad. But its assets (i.e. the loans
it had made) were/are not necessarily worth anything less, it simply couldn't make its short-term payments. (Not unlike Northern Rock, in that repsect -- Northern Rock funded itself using lots of short-term loans, which was all fine when there was lots of credit, but not so good come this crisis).
So, re the Fed: if liquidity is the problem, cut the rates at which banks can borrow. If liquidity isn't the problem but sovency is, cutting the Fed Funds Rate won't make any difference, because the banks will just be taking on more debt that they can't afford.