A simple yet overlooked thought in the current debate about the health of the economy, the subprime credit virus and the proper role of Federal Reserve monetary policy is this: You don't have credit blowups, liquidity freezes, dysfunctional commercial paper markets, suspect bank loan quality -- nor do these ailments spill over into London and European money markets -- when central bank policies are easy and accommodative.

Financial panics and overly stressed markets are symptomatic of tight and restrictive money. In other words, the current story of financial fear, trembling and high anxiety is itself a critically important signal that money is way too tight.

Economists are always on the hunt for indicators to determine whether central banks are fostering liquidity shortages or liquidity excesses. They look at currencies, commodities, bond rates and a host of other price indicators. One such indicator in the economist's arsenal demanding attention is the current financial state of extreme risk aversion, cash hoarding and utter lack of financial confidence. More than any other gauge, it is today's financial panic that unequivocally signals to the Fed (and perhaps the Bank of England and the European Central Bank) that something is wrong with money.

Friday's disappointing jobs report pounds this point home. The unexpected loss of 4,000 corporate payroll jobs (the first drop in four years) plus a very unsettling 316,000 drop in the household jobs survey is consistent with the recent shocks to our financial system.

So were the 81,000 downward revisions to the prior months' of June and July. Incidentally, the only reason unemployment held firm at 4.6 percent is a 340,000-drop in the civilian labor force. This undoubtedly signals worker discouragement and declining labor morale.

After President Bush slashed tax rates four years ago, many of us argued that the rising household survey of jobs gains was a good leading indicator of more work and lower unemployment. We were right. Both the payroll and the household surveys produced over 8 million new jobs, while the unemployment rate dropped from 6.3 percent to 4.5 percent. That said, year-to-date the monthly change in household employment is actually falling by an average of 16,000. This is a big negative and does not bode well for future job tallies.

There are some saving graces to the economic story. While the Goldilocks, soft-landing scenario is imperiled by the deepening financial squeeze, it is not yet completely dead in the water. Recent numbers from the Institute of Supply Managers show an expanding economy in manufacturing and services. Same-store chain sales came in above estimate for August. Personal incomes after tax and after inflation are still rising by 3.8 percent for the 12 months ending in July.

Silver linings aside, the commercial paper market for short-term business loans continues its deep south migration with an almost unprecedented $300 billion evaporation. In the months ahead, nearly a trillion dollars of commercial paper will have to be rolled over. It's hard to say where all this money is going to come from in today's risk-averse environment. At present, investors are more than willing to finance short-term Treasury paper at roughly 4 percent, but so-called asset backed corporate paper is going unfunded despite a better-than-6-percent return. Exactly the same problem is cropping up in the London interbank loan market, as LIBOR rates have jumped nearly a hundred basis points in recent days.

The main point here is that if businesses are unable to access working capital to fund their daily needs, then these firms will be forced to shrink their operations. That means layoffs. Continued...