In New York, the market for commercial paper issued by banks also has faltered. In fact, financial commercial paper has dropped nearly $160 billion in recent weeks. That’s why the authorities have to step in with a short-term backstop. Other measures to relieve banks of their distressed assets, backstop money-market funds, and guarantee all banking deposits will have a positive effect over time, as Paul Volcker noted in the Journal this week.

Meanwhile, the Federal Reserve has essentially moved off its fed funds rate target and is instead focused on injecting huge quantities of new cash into the banking system. The most basic money supply controlled by the Fed is now growing at a 16 percent rate after being nearly flat for 18 months. In the last five weeks the Fed has injected nearly $700 billion through a variety of lending facilities. This is important. The demand for liquidity during this period of asset and credit deflation cries out for massive new cash supplies from the central bank.

Then there’s oil, which is almost forgotten in this panic. The $150 oil shock and elevated prices at the pump are what worsened the credit crunch and hastened the recession. But now oil is about $80 a barrel. When the dust finally clears, lower energy prices will be an important tax-cut, pro-recovery factor. Meanwhile, the exchange value of the U.S. dollar is up 16 percent in recent months. That’s an anti-inflationary sign of confidence.

And as John Steele Gordon writes, hopefully we have learned to stop forcing banks to give mortgages to un-creditworthy customers, and to stop encouraging Fannie and Freddie to package these bad loans.

I recall the despair that surrounded the S&L/junk-bond credit crunch twenty years ago. Nobody believed prosperity would return for a long time. Commentators on the left wrote about the decline of the U.S. economy and American power. Yet the 1990s witnessed a strong prosperity boom; the free-market model of capitalism triumphed and the socialist model in Russia and elsewhere collapsed.

Yes, the months ahead are going to be tough. But I remain optimistic that our free democracy and free-market economy will survive this crisis as well.