New Jersey Survival

But the implication of the Bush comment was that Islamists were behind the assassination. It was the Taliban madmen again, the al-Qa’ida spider who struck at this lone and brave woman who had dared to call for democracy in her country.

Of course, given the childish coverage of this appalling tragedy – and however corrupt Ms Bhutto may have been, let us be under no illusions that this brave lady is indeed a true martyr – it’s not surprising that the “good-versus-evil” donkey can be trotted out to explain the carnage in Rawalpindi.

Who would have imagined, watching the BBC or CNN on Thursday, that her two brothers, Murtaza and Shahnawaz, hijacked a Pakistani airliner in 1981 and flew it to Kabul where Murtaza demanded the release of political prisoners in Pakistan. Here, a military officer on the plane was murdered. There were Americans aboard the flight – which is probably why the prisoners were indeed released.

Only a few days ago – in one of the most remarkable (but typically unrecognised) scoops of the year – Tariq Ali published a brilliant dissection of Pakistan (and Bhutto) corruption in the London Review of Books, focusing on Benazir and headlined: “Daughter of the West”. In fact, the article was on my desk to photocopy as its subject was being murdered in Rawalpindi.

Towards the end of this report, Tariq Ali dwelt at length on the subsequent murder of Murtaza Bhutto by police close to his home at a time when Benazir was prime minister – and at a time when Benazir was enraged at Murtaza for demanding a return to PPP values and for condemning Benazir’s appointment of her own husband as minister for industry, a highly lucrative post.

In a passage which may yet be applied to the aftermath of Benazir’s murder, the report continues: “The fatal bullet had been fired at close range. The trap had been carefully laid, but, as is the way in Pakistan, the crudeness of the operation – false entries in police log-books, lost evidence, witnesses arrested and intimidated – a policeman killed who they feared might talk – made it obvious that the decision to execute the prime minister’s brother had been taken at a very high level.”

When Murtaza’s 14-year-old daughter, Fatima, rang her aunt Benazir to ask why witnesses were being arrested – rather than her father’s killers – she says Benazir told her: “Look, you’re very young. You don’t understand things.” Or so Tariq Ali’s exposé would have us believe. Over all this, however, looms the shocking power of Pakistan’s ISI, the Inter Services Intelligence.

This vast institution – corrupt, venal and brutal – works for Musharraf.

But it also worked – and still works – for the Taliban. It also works for the Americans. In fact, it works for everybody. But it is the key which Musharraf can use to open talks with America’s enemies when he feels threatened or wants to put pressure on Afghanistan or wants to appease the ” extremists” and “terrorists” who so oppress George Bush. And let us remember, by the way, that Daniel Pearl, the Wall Street Journal reporter beheaded by his Islamist captors in Karachi, actually made his fatal appointment with his future murderers from an ISI commander’s office. Ahmed Rashid’s book Taliban provides riveting proof of the ISI’s web of corruption and violence. Read it, and all of the above makes more sense.

But back to the official narrative. George Bush announced on Thursday he was “looking forward” to talking to his old friend Musharraf. Of course, they would talk about Benazir. They certainly would not talk about the fact that Musharraf continues to protect his old acquaintance – a certain Mr Khan – who supplied all Pakistan’s nuclear secrets to Libya and Iran. No, let’s not bring that bit of the “axis of evil” into this.

So, of course, we were asked to concentrate once more on all those ” extremists” and “terrorists”, not on the logic of questioning which many Pakistanis were feeling their way through in the aftermath of Benazir’s assassination.

It doesn’t, after all, take much to comprehend that the hated elections looming over Musharraf would probably be postponed indefinitely if his principal political opponent happened to be liquidated before polling day.

So let’s run through this logic in the way that Inspector Ian Blair might have done in his policeman’s notebook before he became the top cop in London.

Question: Who forced Benazir Bhutto to stay in London and tried to prevent her return to Pakistan? Answer: General Musharraf.

Question: Who ordered the arrest of thousands of Benazir’s supporters this month? Answer: General Musharraf.

Question: Who placed Benazir under temporary house arrest this month? Answer: General Musharraf.

Question: Who declared martial law this month? Answer General Musharraf.

Question: who killed Benazir Bhutto?

Er. Yes. Well quite.

So far, no major politicians or editorial writers have labeled these actions “class warfare,” although this is precisely what Bush is engaged in — helping the already rich and powerful at the expense of everyone else. Class warfare is, in fact, the very essence of Bush’s tenure in the White House. In thousands of ways, big and small, Bush has promoted the interests of the very rich and the largest corporations. Corporate lobbyists have the run of the White House. Their agenda - tax cuts for the rich and big business, attacks on labor unions, and the weakening of laws protecting consumers, workers and the environment from corporate abuse - is Bush’s agenda.

For example, Bush has handed the pharmaceutical industry windfall profits by restricting Medicare’s ability to negotiate for lower prices for medicine. He targeted huge no-bid federal contracts to crony companies like Haliburton to supply emergency relief, reconstruction services and materials to rebuild Katrina while attempting to slash federal wage laws for reconstruction workers. He repealed Clinton-era “ergonomics” standards, affecting more than 100 million workers, that would have forced companies to alter their work stations, redesign their facilities or change their tools and equipment if employees suffered serious work-related injuries from repetitive motions. He opposed stiffer health and safety regulations to protect mine workers and cut the budget for federal agencies that enforce mine safety laws. Not surprisingly, under Bush, we’ve seen the largest number of mine accidents and deaths in years. Bush’s Food and Drug Administration lowered product-labeling standards, allowing food makers to list health claims on labels before they have been scientifically proven. His FDA chief announced that the agency would no longer require claims to be based on “significant scientific agreement,” a change that the National Food Processors Association, the trade association of the $500 billion food processing industry, had lobbied for. Bush resisted efforts to raise the minimum wage (which had been stuck at $5.15 an hour for nine years) until the Democrats took back the Congress earlier this year.

Virtually every week since he took office, the Bush administration has made or proposed changes in our laws designed to help the rich and powerful while harming the most vulnerable people in society and putting the middle class at greater economic risk. The list of horrors can be so numbing that one can lose sight of the cumulative impact of these actions. Taken together, they add up to the most direct assault on working people, the environment and the poor that the country has seen since the presidency of William McKinley over a century ago.

Bush has been a persistent practitioner of top-down class warfare , but the media rarely characterize his actions that way. In contrast, when progressive activists, unions, environmental groups, community organizations and politicians support legislation and rules to redress the balance of power and wealth, they are inevitably described as engaging in c lass warfare . Top-down class warfare seems to be OK, but bottom-up class warfare is apparently a no-no.

The class warfare rap is now being used against John Edwards, when he talks about challenging the power of the insurance and drug corporations. In a recent speech, Edwards said that his campaign was about challenging “the powerful, the well-connected and the very wealthy.” But wary of being criticized for fueling class resentments, even Edwards felt it necessary to say “This is not class warfare. This is the truth.”

Yes, the truth is that the rich have been at war with the rest of the country. It isn’t a question of “”rich against the poor,” which is often how leftists describe things. That leaves out most Americans. Its the very rich versus everyone else.

As Robert Kuttner observes in his new book, The Squandering of America, from 1966 to 2001, the wealthiest one-tenth of all Americans captured the lion’s share of society’s productivity growth. But it was the top one tenth of 1 percent that gained the very most. Those between the 80th and 90th percentiles about held their own. Those between the 95th and 99th percentiles gained 29 percent, while those between the top 99 and 99.9 percentile, gained 73 percent.

“But,” Kuttner writes, “it was those at the very pinnacle –the top one tenth of 1 percent of the population - one American in a thousand - who gained a staggering 291 percent.”

Wealth has become even more concentrated during the Bush years. Today, the richest one percent of Americans has 22 percent of all income and about 40 percent of all wealth. This is the biggest concentration of income and wealth since 1928. In 2005, average CEO pay was 369 times that of the average worker, compared with 131 times in 1993 and 36 times in 1976. At the pinnacle of America’s economic pyramid, the nation’s 400 billionaires own 1.25 trillion dollars in total net worth - the same amount as the 56 million American families at the bottom half of wealth distribution.

Meanwhile, despite improvements in productivity, the earnings of most workers have been stagnant, while the cost of health care, housing, and other necessities has risen. The basics of the American Dream - the ability to buy a home, pay for college tuition and health insurance, take a yearly vacation, and save for retirement - have become increasingly slippery. And for the 37 million Americans living below the official poverty line - $17,170 a year for a family of three - the dream has become a nightmare.

In many ways, America today resembles the conditions in the late 1800s that was called the Gilded Age. It was an era of rampant, unregulated capitalism. It was a period of merger mania, increasing concentrations of wealth among the privileged few, and growing political influence by corporate power brokers called the Robber Barons. During the Gilded Age, new technologies made possible new industries, which generated great riches for the fortunate few, but at the expense of workers, consumers, and the environment. The gap between the rich and other Americans widened dramatically.

It was also an era of massive immigration to the US from people fleeing political persecution and economic hardship. In the growing cities of the early 20th century, there were terrible poverty, child labor, sweatshops, slums, and serious public health crises, including major epidemics of contagious diseases.

But out of that turmoil, activists created a “Progressive” movement, forging a coalition of immigrants, unionists, middle-class reformers, settlement house workers, muckraking journalists, clergy, and upper-class philanthropists. They fought for, and won, better working conditions, better housing, better schools, and better public services like sanitation and public health laws. Those reforms began at the local and state levels, but eventually laid the foundation for a wave of reform at the federal level - the New Deal.

In 1939, in the midst of the Great Depression, the balladeer Woody Guthrie wrote a song about bank robbers and outlaws. “Yes, as through this world I’ve wandered, I’ve seen lots of funny men,” Guthrie wrote, “Some will rob you with a six-gun, and some with a fountain pen.”

Throughout his Presidency, Bush has used his pen to sign regulations and laws that make the rich richer, allow big business to pollute the environment, reduce wages, and rip-off borrowers and consumers.

But Americans finally seem to have caught on. Iraq, Katrina, Enron, the current wave of foreclosures, and other events have helped wake them up to the reality that Bush’s top-down class warfare has done great damage to our country. We now may be on the brink of another progressive era. Bubbling below the surface is a new wave of social activism.

Today’s progressive movement is almost invisible to the mainstream media, but it is obvious to anyone involved in the struggle for social justice. It has many of the same elements as 100 years ago. There is a new wave of activism across America among labor unions, community organizations, environmental groups, immigrant rights activists, and grassroots housing and health care reformers. In the last decade, for example, more than 150 cities, dozens of counties, and now one state (Maryland) have adopted “living wage” laws to lift low-wage workers out of poverty, the result of solid organizing efforts by networks of unions, religious congregations, and community groups like ACORN and the Los Angeles Alliance for a New Economy. Environmentalists and unions - who were barely on speaking terms for many years - are now forging alliances to push for “green” jobs and waging joint campaigns, such as the coalition of Teamsters and environmental activists working together to clean up the Los Angeles/Long Beach port, the nation’s largest port and also its most polluted, and unionize the immigrant truck drivers.

Like the Progressive and New Deal eras, there is now a growing number of politicians at the local, state and national level who help give voice to this burgeoning movement. When they do, they are accused of engaging in “class warfare.” They should wear it as a badge of honor.

The real power resides in the corporate oligarchy that runs this country. It has a strangle hold on America. The only point of an election in our two party-one party system is to determine which one carries out the agenda. If we do something about that, we might be able to change something.

David Korten, author of “When Corporations Rule the World”, points out that “the basic design of the private-benefit corporation was created in 1600 when the British crown chartered the British East India Company as what is best described as a legalized criminal syndicate to colonize the resources and economies of distant lands…” Today’s American corporations evolved from that.

When you see the feeding frenzy of US corporations in Iraq–Halliburton, Bechtel, Blackwater, and a host of others, you can understand what Korten is talking about.

The corporation is a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members. The private-benefit corporation is just that–a corporation chartered for its own private benefit, but it has to provide some socially positive good. If the corporation, chartered by the state, fails to provide the function for which it is chartered, or misapplies the function, the charter can be revoked. The state giveth and the state can taketh away. But when was the last time you heard of a corporation’s charter being revoked?

Over the years, the Supreme Court has bestowed additional blessings on corporations. In effect, it has made them almost human, granting them some of the same rights as US citizens, freedom of speech and freedom of the press, for example. Corporations can express there opinions in public and in the media as you or I can. This gives them enormous power, simply because they have more mullah than you or I. They can buy up commercial television time and print media ads and faux news coverage, because they have the power and the money and besides, they own most of the mainstream media.

As Sarah Stodola says in The Brooklyn Rail, “The Supreme Court has interpreted the Constitution in a manner that has allowed corporations to ascend to unprecedented levels of power. The phenomenon even has a name, and that name is ‘corporate personhood.’ And corporate personhood, friends, is why corporations are able to buy elections.”

So what are we going to do to change all this?

Well, there are some things that can be done, short of revolution. We can start evaluating capitalism, for starters.

Elect a Congress that serves “We the People”, not “They, the corporations”. Easier said than done. How do you find candidates who are not beholden to corporations, special interests or any ethnic voting block?

I would hate to think we will have to wait for the looming economic collapse to do the job for us. We are living on borrowed time. When purchasing power of the US citizen reaches the end of its rope, the collapse will come. You can take that to the bank.

The Great Depression of the 1930s must have taught us something. When people lose everything they tend to wake up. They look around and see what’s been done to them and what they’ve done to themselves by not paying attention. From their Hoovervilles, the people, hit by the depression, saw Hoover and his rotten administration for what it was, and threw the bums out. They elected new, progressive leaders (FDR Democrats), who saved capitalism with safety nets and a “New Deal”.

Can we do something like that again; hopefully before the coming economic collapse? We’d better start trying now, and maybe ease the pain. Here are some things that need to be done.

Reverse Reaganomics. Reinstitute regulation of industry. Make the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC), for example, do their jobs, so that we don’t have US corporations off-shoring their manufacturing to another country, like China, for example, and then importing their product, like toys, for example, painted with lead, for our children to play with.

Soak the Rich, a phrase coined by FDR when he spoke about the “Economic Royalists” who brought this country to its knees. Instead of cutting taxes for the rich, as Bush has been doing, raise taxes for the rich and their corporate enterprises, as they did during the great depression when FDR laid a tax rate on them of over 90% in the upper brackets.

Marshal Plan on Energy — Go cold turkey on our addiction to oil. Massive investment in the new technologies of alternative energy sources, wind, solar, geothermal. Halt the return to nuclear, and head off the development of biofuels that will put our food into your gas tanks. We can create new high-tech industries and high-paying jobs with a new energy world.

Single Payer Universal Health Care - end the merry-go-round on health care by political candidates. Get rid of the blood-sucking health insurance companies, once and for all. And make health care for our citizens a right and not a privilege. Any candidate for office will get elected on that platform.

Stop the Hemorrhaging in Afghanistan and Iraq - Four thousand dead American soldiers is four thousand too many. Two trillion dollars to destroy two countries is two trillion dollara that could have been used to rebuild the infrastructure of our country and have enough left to enhance the lives of our young and our old.

David Korten says, “Capitalism, which means quite literally rule by financial capital–by money and those who have it–in disregard of all non-financial values, has triumphed over democracy, markets, justice, life, and spirit. There are other ways to organize human societies to actualize the positive benefits of markets and private ownership. They require strong, active, democratically accountable governments to set and enforce rules that assure costs are internalized, equity is maintained, and market forces are channeled to the service of democracy, justice, life, and spirit.”

Yes, we can do all that, if we want to.

One of Britain’s leading economists, Peter Spencer, issued a warning on Saturday:

“The Government must suspend a set of key banking regulations at the heart of the current financial crisis or risk seeing the economy spiral towards a future that could make 1929 look like a walk in the park”.

Spencer is right. The banks don’t have the money to loan to businesses or consumers because they’re desperately trying to raise more cash to meet their capital requirements on assets that continue to be downgraded. (The Fed may pay $.85 on the dollar, but investors are unwilling to pay anything at all.)Spencer correctly assumes that the reason the banks have stopped lending is not because they “distrust” other banks, but because they are capital-strapped from all their “off balance” sheets shenanigans. If the Basel regulations aren’t modified, money markets will remain frozen, GDP will shrink, and there’ll be a wave of bank closings.

Spencer said:

“The Bank is staring into the abyss. The Financial Services Authority must go round and check that all banks are solvent, and then it should cut the Basel capital requirement level from 8pc to about 6pc.” (“Call to Relax Basel Banking Rules, UK Telegraph)
Spencer confirms what we already knew; the banks are seriously under-capitalized and will come under growing pressure as hundreds of billions of dollars of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) continue to lose value and have to be propped up with additional capital. The banks simply don’t have the resources and there’s going to be a day of reckoning.

Pimco’s Bill Gross put it like this:

“What we are witnessing is essentially the breakdown of our modern day banking system.” Gross is right, but he only covers a small portion of the problem.

Economist Ludwig von Mises is more succinct in his analysis:

“There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The basic problem originated with the Federal Reserve when former Fed chief Alan Greenspan lowered interest rates below the rate of inflation for 31 months straight which pumped trillions of dollars of low interest credit into the financial system and ignited a speculative frenzy in real estate. Greenspan has spent a great deal of time lately trying to avoid any blame for the catastrophe he created. He is a first-rate “buck passer”. In Wednesday’s Wall Street Journal, Greenspan scribbled out a 1,500 defense of his actions as head of the Federal Reserve pointing the finger at everything from China’s “low cost workforce” to “the fall of the Berlin Wall”. The essay was typical Greenspan gibberish. In his trademark opaque language; Greenspan tiptoes through the well-documented facts of his tenure as Fed chief to absolve himself of any personal responsibility for the ensuing disaster.

Greenspan’s polemic is a masterpiece of circuitous logic, deliberate evasion and utter denial of reality. He says:

“I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.”

“Not major”? 3.5 million potential foreclosures, 11 month inventory backlog, plummeting home prices, an entire industry in terminal distress pulling down the global economy is not major?

But Greenspan is partially correct. The troubles in housing cannot be entirely attributed to the Fed’s “cheap credit” monetary policies. They were also nursed along by a Doctrine of Deregulation which has permeated US capital markets since the Reagan era. Greenspan’s views on how markets should function were–to great extent–shaped by this non-interventionist/non-supervisory ideology which has created enormous equity bubbles and horrendous imbalances. The former-Fed chief’s support for adjustable-rate mortgages (ARMs) and subprime lending; shows that Greenspan thought of himself as more as a cheerleader for the big market-players than an impartial referee whose job was to monitor reckless or unethical behavior.

Greenspan also adds this revealing bit of information in his article:

“The value of equities traded on the world’s major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions.” (“The Roots of the Mortgage Crisis”, Alan Greenspan, WS Journal)

This admission proves Greenspan’s culpability. If he knew that stock prices had doubled their value in just 3 years, then he also knew that equities had not risen due to increases in productivity or demand.(market forces) The only reasonable explanation for the asset inflation, therefore, was monetary policy. As his own mentor, Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon”. Any capable economist would have known that the explosion in housing and equities prices was a sign of uneven inflation. Now that the bubble has popped, inflation is spreading like mad through the entire economy.

Greenspan is a very sharp man. It is crazy to think he didn’t know what was going on. This is basic economic theory. Of course he knew why stocks and housing prices were skyrocketing. He was the one who put the dominoes in motion with the help of his well-oiled printing press.

But Greenspan’s low interest credit is only part of the equation. The other part has to do with way that the markets have been transformed by “structured finance”.

What’s so destructive about structured finance is that it allows the banks to create credit “out of thin air”, stripping the Fed of its role as controller of the money supply. Author David Roache explains how this works in an excerpt from his book “New Monetarism” which appeared in the Wall Street Journal:

“The reason for the exponential growth in credit, but not in broad money, WAS SIMPLY THAT BANKS DIDN’T KEEP THEIR LOANS ON THEIR BOOKS ANY MORE—AND ONLY LOANS ON BANK BALANCE SHEETS GET COUNTED AS MONEY. Now, as soon as banks made a loan, they “securitized” it and moved it off their balance sheet.

There were two ways of doing this. One was to sell the securitized loan as a bond. The other was “synthetic” securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been “securitized.”

So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks’ balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.” (Wall Street Journal)

This is truly mind-boggling.

The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed their was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.

Now, unfortunately, the mechanism for generating new loans (and fees) has broken down. The main sources of bank revenue have either been seriously curtailed or dried up entirely. (Mortgage-backed) Commercial paper (ABCP) one such source of revenue, has decreased by a full-third (or $400 billion) in just 17 weeks. Also, the securitization of mortgage-backed securities is DOA. The market for MBSs and CDOs and other complex bonds has followed the Pterodactyl into the history books. The same is true of structured investment vehicles (SIVs) and other “off balance-sheet” swindles which have either gone under entirely or are presently withering with every savage downgrade in mortgage-backed bonds. The mighty gear that was grinding out the hefty profits (“structured investments”) has suddenly reversed and—like a millstone that breaks free from its support-axle–is crushing everything in its path.

The banks don’t have the reserves to cover their downgraded assets and the Federal Reserve cannot simply “monetize” their bad bets. There’s no way out. There are bound to be bankruptcies and bank runs. “Structured finance” has usurped the Fed’s authority to create new credit and handed it over to the banks. Now everyone will pay the price.

Wary investors have lost their appetite for risk and are steering-clear of anything connected to real estate or mortgage-backed bonds. That means that an estimated $3 trillion of securitized debt (CDOs, MBSs and ASCP) will come crashing to earth delivering a withering blow to the economy.

And it’s not just the banks that will take a beating either. As Professor Nouriel Roubini points out, the broker dealers, the investment banks, money market funds, hedge funds and mortgage lenders are in the crosshairs as well.

Nouriel Roubini:

“Non-bank institutions do not have direct access to the Fed and other central banks liquidity support and they ARE NOW AT RISK OF A LIQUIDITY RUN as their liabilities are short term while many of their assets are longer term and illiquid; so the risk of something equivalent to a bank run for non-bank financial institutions is now rising. And there is no chance that depository institutions will re-lend to these to these non-banks the funds borrowed by central banks as these banks have severe liquidity problems themselves and they do not trust their non-bank counterparties. SO NOW MONETARY POLICY IS TOTALLY IMPOTENT IN DEALING WITH THE LIQUIDITY PROBLEMS AND THE RISKS OF RUNS ON LIQUID LIABILITIES OF A LARGE FRACTION OF THE FINANCIAL SYSTEM.” (Nouriel Roubini’s Global EconoMonitor)

In past financial crises - the stock market crash of 1987, the aftermath of Russia’s default in 1998 - the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.

Why not? Because the problem with the markets isn’t just a lack of liquidity - there’s also a fundamental problem of solvency.

Let me explain the difference with a hypothetical example.

Suppose that there’s a nasty rumor about the First Bank of Pottersville: People say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.

Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices - and it may indeed go bust even though it didn’t really make that bum loan.

And because loss of confidence can be a self-fulfilling prophecy, even depositors who don’t believe the rumor would join in the bank run, trying to get their money out while they can.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity - the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Matters are very different, however, if the rumor is true: The bank really did make a big bad loan. Then the problem isn’t how to restore confidence; it’s how to deal with the fact that the bank is really, truly insolvent, that is, busted.

My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia’s default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.

But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system - both banks and, probably even more important, nonbank financial institutions - made a lot of loans that are likely to go very, very bad.

It’s easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.

First, the United States had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

As home prices come back down to earth, many of these borrowers will find themselves with negative equity - owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity.

If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies - I mean, the bad debts - are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.