Ah Haa! I have no idea of the distinction between the two.
Liquidity means not having sufficient cash. Solvency (or lack thereof) means not having sufficient cash to pay your bills. Correct?
The difference is really between illiquidity and insolvency. It is quite possible to be solvent (i.e. all your assets minus all your liabilities equals a positive number) while being illiquid (i.e. no cash on hand to pay bills coming due right now. It’s a whole lot worse to be insolvent than to be illiquid. If you’re just illiquid but still solvent, it’s just a matter of time until you’re lquid again, and creditors will keep that in mind when negotiating with you about your currently overdue bills. If you’re insolvent, you’ll be pushed directly into bankruptcy court, so your creditors can start the process of claiming whatever reduced percentage of what they’re owed, is salvageable given your insolvent condition.
If you own a house free and clear that will easily sell for $100,000 even in this market, but only have $50 cash in the bank, and have an electric bill for $300 that’s due tomorrow, you have a liquidity problem, but you’re not insolvent. It’s reasonable to expect that the electric bill will get paid fairly soon (probably when you take out a home equity loan). But if you owe $150,000 on a house that will sell for $100,000 in this market, and $125,000 even when the housing market is back to normal, and you have that electric bill for $300 due tomorrow, you’re not just illiquid but also insolvent.
Insolvent banks are a big problem; illiquid banks are really just a little problem, that can be easily solved by emergency loans from a central bank, without any negative impact on the economy, inflation, etc.
A liquidity crisis occurs when you have sufficient assets, but cannot liquidate them fast enough to prevent a default.
Insolvency means that insufficient assets exist, regardless of liquidity.