“In a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.” —Greg Ip, @WSJ

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Is the economy facing a liquidity crisis, or a solvency crisis? The distinction will determine how important the Federal Reserve is to returning the economy to health.

In a liquidity crisis, otherwise healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. In a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.

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