Last week Congress passed the Troubled Asset Relief Program (TARP). The House balked at passing the bill on Tuesday, but upon further review, decided that a version of the bill passed by the Senate was necessary.

The TARP is vital to restoring the health of the banking system, but it will take time to achieve that result. The immediate problem in the markets is the inability of creditworthy businesses to get short-term financing. Major companies issue short-term IOUs called “commercial paper.” These notes typically come due every 30 to 90 days at which time they are simply renewed. It is becoming increasingly difficult to find buyers for these notes because investors have flocked to the perceived safety of treasury bills.

Investor fear is extreme and it would not be surprising to see a short-term bounce in the stock market in the near future. The sustainability of that advance largely depends on restoring some sense of normalcy to the commercial paper market.

The longer that market is dysfunctional, the greater will be the damage to the economy. In addition, the economy risks slipping into deflation if credit conditions don’t begin to normalize. Look for coordinated interest rate cuts by central banks around the world. If that doesn’t start to unclog the markets, the authorities will undoubtedly come up with another plan.