If the stock market is the thermometer of the economy, then the credit market is the life blood. And lately there are signs that the U.S. economy's circulatory system is improving.

Sales of commercial paper have increased considerably since the U.S. Federal Reserve launched its Commercial Paper Funding Facility (CPFF) to jump-start the corporate, short-term lending market, Bloomberg News reported Wednesday. Commercial paper sales totaled $67.1 billion on Monday, October 27, the first day of CPFF operation, and $41.6 billion Tuesday, compared with last week's daily average of $6.7 billion.

CPFF is working, so far

Economist David H. Wang told BloggingStocks Wednesday he likes what he's seeing regarding commercial paper flows this week.

"This is very encouraging, maybe our most important credit data point since the financial crisis started. The Fed's commercial paper facility is having its intended effect. If the trend continues, it points to a near-normalization of this critical market. Interest rates will be higher, but the fact that money is flowing is another positive step."

Short-term rates, including rates for commercial paper, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt, etc.

The resources of the central bank of the world's second strongest economy have now been marshaled to address the global financial crisis.

The European Central Bank, led by President Jean-Claude Trichet has shifted policy - - a remarkable, historic change - - and is now working in coordination with its companion major central banks - - the U.S. Federal Reserve, Bank of England, Bank of Japan, and the Bank of China - - and others, to end a credit crisis that threatens to cripple international business and seriously damage economies, worldwide.

A legendary inflation hawk,Trichet, whose ECB lowered its key, short-term interest rate by 50 basis points in conjunction with the other major central banks on Wednesday, declined to rule out further steps to solve the crisis, including additional interest rate cuts, Bloomberg News reported Thursday.

ECB: banks offered unlimited cash at 3.75%

Further, and equally significant, Trichet offered banks unlimited cash at 3.75% to help them cope with tight credit markets, Reuters reported Thursday. Previously, the ECB had offered funds to the highest bidders, a tactic that pushed average rates as high as 4.99% - - almost 75 basis points above the official rate.

In addition, the ECB cut in half the premium it charges for overnight emergency loans and increased the interest rate it pays on deposits, Reuters reported Thursday.

With talk this morning of a plan for the Fed to set up Special Purpose Vehicles -- remember Enron? -- to buy up Commercial Paper (CP), a shrinking $1.6 trillion market of month long loans used to pay employees and buy inventory, we are now getting to the point where the Fed and the Treasury are the only bank that's still making loans. And with the new SPVs it looks like the Fed is running out of money to sop up all the financial toxic waste. The other banks seem to be frozen by fear. They borrow money from the Fed and clutch it to their breast, unable to trust that it they lend it to others that it will get paid back with interest.

But the good news for the time being is that the world still thinks of U.S. treasury bills as the safest place to park money. As a result, the Treasury can sell an apparently unlimited quantity of them to investors around the world and pay virtually no interest in the bargain. As long as this continues, it creates an opportunity to put that money to some positive use -- instead of throwing it at the world markets and watching value evaporate -- e.g., $2 trillion has disappeared since the $810 billion bailout bill to save us from heaven's wrath was about to pass.

The Fed could charter, say, 100 new banks around the country. These banks would be capitalized by a combination of money from the Treasury and private investors. Their deposits would be insured up to $250,000 and they would be required to lend out no more than $10 for every dollar of capital. They would be run by experienced bank executives who had been carefully vetted for their lending prudence. And because of their pristine balance sheets, they would be comfortable lending to each other -- knowing that they could get more capital if needed.

The mood of banks toward banks remains cautious and guarded. The London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loans -- increased 157 basis points to 3.94% early Tuesday morning.

The Euribor, a similar rate for the euro, rose 22 basis point to 4.37%. However, the Euribor has fallen from Monday's all-time high of 5.35%.

Currency Trader Andrew Resnick told BloggingStocks Tuesday overnight interest rates remain at elevated levels mainly due to fear.

"The biggest problem, clearly, is the lack of confidence. There are distressed and bad bonds out there, but it should not be affecting the financial system this much. The reason it has is fear. No one knows who owns what bonds, and no one trusts anyone," Resnick said. "This is the worst condition I've seen in the credit markets in my 20 years of trading." Resnick added that he was presently flat, or had no open currency trading positions.

Resnick said central banks may have to guarantee the assets of creditors to banks and/or provide insurance (credit default swaps) to purchasers of corporate commercial paper to lower overnight interest rates and increase the flow of credit. Or central banks may have to "undertake a large investment in banks to recapitalize them," he said.

Hank Paulson is spending this morning on the talk show circuit trying to scare up $700 billion of our money. And he wants that money by tonight. Not only that, but he wants to be able to spend it without anyone ever being able to question his decisions. Paulson and his colleagues have already thrown $800 billion at the problem and that didn't work. So what's the big hurry? And exactly what does he think will happen if he doesn't get the money?

This administration has a penchant for secrecy that seems to be at odds with how a democracy is supposed to work. For instance, a judge ordered the vice president to retain records that he was planning to destroy. There is a small chance that he has done things in office that he doesn't want anyone else to know about. Meanwhile, Section 8 of the Act Paulson is pushing so hard to pass says "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." In other words he wants absolute power and complete secrecy.

As I explained to janelanaweb.com, Paulson perceives that the global financial system will cease to function unless he gets his money. Now the New York Post provides a little detail from anonymous sources -- which if true -- could help shed some light on what's irking Paulson. According to the Post, if the Fed had not injected $105 billion into the money markets on Thursday, the Dow would have dropped 22% to 8,300. That's because, "money market funds [which have $3.4 trillion in assets] were inundated with $500 billion in sell orders prior to the opening," according to the Post.

This morning brings fresh worries over the health of global credit markets.

In Europe, corporate bond spreads widened and share prices were under pressure as overnight deposit rates for euros rose to a six-year high, according to Bloomberg, "prompting calls for the European Central Bank to supply more cash."

A Wall Street Journal (subscription required) report, "Why Libor Defies Gravity," noted that the London interbank offered rate, "an important benchmark for everything from adjustable-rate mortgages in the U.S. to giant floating-rate bank loans taken out by global corporations," has moved higher in recent weeks, despite efforts by central bankers to keep a lid on short-term interest rates.