The truth behind the credit market lockup has nothing to do with liquidity or lack of capital in the system, it is literally about TRUTH itself.  Let me list a few examples that illustrate my point.

1. In March, Bear Stearns' CEO goes on national TV and claims they are well capitalized and don't have a liquidity problem.  This statement is backed up from the SEC a regulatory agency in charge of monitoring Bear Stearns.  Only a week later Bear Stearns collapses and we later learn, they did not just have liquidity problems but were in fact insolvent (effectively bankrupt) by a wide margin.
2. In July, Indymac issues a statement saying they are well capitalized to handle there problems.  The OTS/FDIC issue a similar statement saying they don't see any problems with Indymac's capitalization.  Only about a week later IndyMac fails, is seized by the FDIC, and we later learn as their assets begun to be liquidated, that they are in fact insolvent by over $8B.  This is against total assets of only $32B, so that is not even close to being solvent.
3. Fannie Mae and Freddie Mac along with regulators repeatadly issue statements that they are in a solid financial position and well capitalized.  In September the government seizes and nationalizes these two GSE's and the truth comes out that the bailout is going to cost tens of billions if not hundreds of billions of dollars.  In fact they were no where near solvent or well capitalized as claimed.
   
4. Lehman Brother's makes numerous statements on their capital adequacy throughout the summer and early fall.  When they finally blow up the CDS auctions show that bond holders are only expected to receive about 9 cents on the dollar once assets are liquidated.  They were insolvent by a huge margin.
5. Washington Mutual and Wachovia, two of the largest banks in the US, effectively fail and received arranged shotgun marriages with the help of the FED and FDIC.  As part of these shotgun marriages they each write down tens of billions of dollars in bad loans they'd been holding on their books and claiming in financial statements were good.
6. Wells Fargo's CEO gets on national TV and claims Wells Fargo has never done risky lending such as subprime, stated income, interest only, no ratio.  Cough, cough, bullshit, they're sitting on a metric ton of that stuff.
   

Starting to see a pattern here?  Not only are companies repeatedly cooking the books and lying to everybody involved about their true financial state, but the regulatory agencies are not calling them on it and in some cases helping to cover it up.  These regulatory agencies have literally had staff inside these corporations monitoring their financial state on a day to day basis so you are left with two choices.  Either the regulators are more incompetent the Michael Brown of Hurricane Katrina fame or they are flat out lying to the same public they are supposed to protect.

So here's my point.  Now that we've had a few major failures and people realize that not only are companies lying about their financials, but regulators are not making them come clean, everybody is assumed guilty by players in the financial system.  That is why the credit markets are locking tight, LIBOR skyrocketing and spreads blowing out..  It has nothing to do with companies not having capital to lend, in fact there maybe more liquidity in the system than ever.   It's the fact that lenders don't trust that they'll get the money back if they do lend it.  The government can throw as much liquidity into the tornado as they want but they can't force the institutions to lend. 

This is why despite the absolutely massive liquidity injections, backstopping and bailouts the credit market lockup continues to get worse.  More liquidity can not solve a trust problem.  The ONLY way you can unlock the markets is to force transparency in the system, expose those companies who are insolvent and deal with them.  If you don't you don't do this, all companies will be assumed to be lying and insolvent whether they are or not and nobody will lend.  This is why the government's expensive bailout plans are literally doomed to fail.