I have been seeing the markets crumble around us, and I am of course concerned like everyone else. The central banks around the world have been trying to stave off the abyss, and have thrown everything at the markets. Nothing has worked. There are several problems in the markets these days.
There is over $360 trillion (yes, trillion with a T) in financial contracts in the marketplace that is subject to LIBOR (the London interbank offered rate - the rate that banks lend to each other). According to Bloomberg.com, that's over $53,500 per person on earth. When you look at it, ultimately debts are held by people, even if it is artificially held in corporations. This debt becomes the debt for the world, and each and everyone of us is burdened by this. As the amounts are absolutely unsustainable, these financial contracts must be reduced. The market cannot afford this. These debt amounts are absolutely unsustainable. It was absolutely necessary for the banks to deleverage. It just happened that the financial industries appetite for risk (hedge funds, derivatives and mortgage-backed securities) had to doom us. Even though the government has been pumping trillions of dollars into the marketplace, this will not result in reduction of the credit rates. We have seen cuts to bank rates, it has not resulted in lower LIBOR. LIBOR must, must, must decline to more manageable levels before we can return to financial normalcy. Therefore, even if the governments around the world continue to pump money into the markets, we will see the money supply continue to decline as that $53,500/person drops to more normal levels, and LIBOR finally drops to levels closer to the US Fed funds rate.
I will add one thing: I personally feel that we will need Keynesian economics to recover from the long-term problems that we will see from this crisis. Without concerted and worldwide coordinated government projects, the world industrial output will come to a standstill.