That's a very good point. Back in the 1970s, the economy was not unwinding hundreds of billions of dollars of bad loans (and certainly not various securitized derivatives on bundles of bad loans) the way it is now. Those securities had been treated as assets. Now we have no idea what they're worth (except that we know that many are worth nothing).

Those assets were not money, but some of them were "money-like" and many of them, as assets of banks and other financial institutions, stood behind a lot of money.

We simply don't know how the collapse of all those imagined assets will affect the money supply. The Fed is obviously worried. They wouldn't be acting as they are, unless they were seriously afraid that the money supply was in danger of shrinking drastically as the imagined money vanishes from the economy.

The problem is, there's just no way to know how much money there is. The Fed tries to keep track, but so many things act as money part of the time. For example, a HELOC with a large amount of available credit is almost money--the homeowner could write a check for $10,000 at any time. But if that check doesn't get written, is the available credit "money" or not?

This makes a big difference when banks suddenly decide to cut credit limits, as they are now in places where home values have dropped. When the amount of HELOC available to homeowners drops by a billion dollars, has the money supply shrunk? If so, by how much? Probably so. Probably not by a billion dollars, but nobody knows whether it's a lot less or just a little less.

Personally, I'm still worried about inflation, and will stay worried about inflation at least until interest rates are above the inflation rate--but it may be that I'm being very short-sighted. My own attitudes are colored by my having come of age at the peak of the 1970s inflation. The people are the Fed are very clever. It's entirely possible that they're more clever than me. I kind of hope so, actually.