Liquidity, and more so liquidity preferences are vastly misunderstood for a whole host of reasons. A lot of it has to do with the dominant strains of economics battling each other (saltwater vs. freshwater) over which statistical model fails less frequently. In shifting to mathematics and statistics, something great has been lost.

Economists don’t understand how an economy works; and that’s OK with them. Ever since Milton Friedman wrote of Positive Economics in the 1950’s, Economics has trended away from economy.

It’s understandable to some degree, though not entirely sympathetic. The real economy is an impenetrable mess. You simply cannot observe what goes on all day every day every year. Nor can you really, truly understand why things happen the way they do all over a dynamic system that doesn’t ever stand still.

Some aspects are easier to consider and close enough to observation so as to be able to make reasonable inferences. These are most often activities connected to markets and published prices. Market prices are observations after all, no matter how imperfect, as is what happens in terms of liquidity.

When we often think on the word, it is usually in a purely financial context. Companies like banks need it, however, for any number of reasons. The most profitable industrial behemoths sell commercial paper on a daily basis to fund receivables or any other working capital requirements, as do the otherwise most boring names in the S&P 500.

On October 7, 2008, the Federal Reserve created what was really a Special Purpose Vehicle, an off-balance sheet (sort of) entity funded by a loan from FRBNY (collateralized by the entity’s assets). The Commercial Paper Funding Facility (CPFF) did what the name suggests; it bought commercial paper that the private liquidity market was avoiding during a systemic “dollar” run (commercial paper being one of those parts of modern eurodollar liquidity that doesn’t show up as traditional money in traditional money statistics).

We would expect to find out that firms like Bank of America (BAC) or even Bank of Montreal were using it at that time for some measure of liquidity derived from the Federal Reserve. But the CPFF was providing monetary resources also to businesses like McDonald’s (MCD), Verizon (VZ), and Georgia Transmission Corp. When real economy companies like these are placed in such a position it could only be bad.