OK, it took me three reads to get to where I thought I understood this article from Paul Krugman, but it’s worth understanding the montetary policy side of the current financial crisis. Typically, when the economy gets into trouble, The Fed simply produces more money, which increases inflation and helps bouy unstable markets.
That’s what they usually do. However, in this case the T-bill market is in bad enough shape that it’s not capable of helping out in any way. Krugman does a really wonky job of explaining it. It’s worth the multiple reads, honest.