Yves Smith's Naked Capitalism blog is not for the faint of heart.

"Temporary full state ownership is only solution"

Three Month Dollar Libor Increases (dry title, but read all the way to the bottom)

And, if you're not awake yet . . .

Roubini warns of Possible Systemic Meltdown, "Severe Global Depression"

Finally,

International Trade Seizing Up Due to Banking Crisis

For an illuminating snapshot of the progress being made in our long national real estate nightmare, check out this post at the indispensable Calculated Risk blog.

Earlier in the day, I pointed out how Harry Reid’s irresponsible not to mention idiotic comment about an unnamed insurance giant that was teetering on the brink of bankruptcy had caused insurance company stocks to stumble on an industry wide basis. At midday, the damage was only half as grave as it would turn out to be. In case anyone is wondering about the extent of the Reid triggered butcher’s bill at the end of the day, here’s the final carnage:

MET: down 15% or roughly $5 billion
PRU down 11%, or roughly $3 billion
AFL down 7%, or roughly $1.5 billion
TRV down 6% or roughly $1.5 billion

The S&P 500 Insurance Index declined more than 10% - over 25 billion worth of wreckage. But wait – it gets worse. Check out this comment from Senator Reid’s office this afternoon:

A spokesman for Reid said on Thursday that the Senator was not personally aware of any particular company being on the verge of bankruptcy, nor had he talked to any insurance company officials.

"Rather, his comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused," said spokesman Jim Manley.

Oops! Please remember that the Dow as a whole dropped “only” 3%. Please further note that the insurance sector helped lead the market’s woes and the Reid-induced jitters had an effect everywhere.

This all reminds me of Ronald Reagan’s joke about life’s cruelest irony being the phrase, “I’m from the government and I’m here to help.” It also reminds me of the considerably less famous phrase, “What a big mouth that senator has!”

There are a couple of stories in the news today that illustrate the main street impact of what many currently view as a Wall Street problem. Does a stunning tightening of credit affect the man in the street? You bet:

AT&T this week announced they're feeling the strain of the credit crunch, with Chairman and CEO Randall Stephenson saying the company was unable to sell any commercial paper (short term IOU notes) last week for terms longer than overnight. The company this week also announced that they've undergone a major reorganization in order to respond more quickly to cable competition. Managers tell GigaOM privately that they're expecting layoffs between 5% and 20% before long, thanks to declining landline sales, struggling markets, and the recent merger.

That's not a direct link between the credit squeeze and the layoffs, but the increased cost of borrowing faced even by a firm like AT&T is far more dangerous to thousands or millions of smaller companies. And it's not just businesses that are hurt; it's local governments as well:

Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.

As Rates Soar, a Slowdown in the Municipal Market The sudden loss of credit, one of the ripple effects of the current financial turmoil, is affecting local governments in all parts of the country, rich and poor alike. In New York, a real estate boom has suddenly gone bust. Washington has shelved a planned bond offering to pay for terminal expansion and parking garages already under construction at Dulles and Reagan National Airports.

Billings, Mont., is struggling to come up with $70 million more for a new emergency room. And Maine has been unable to raise $50 million for highway repairs.

And for conservatives who are skeptical about the need for a rescue package, I ask the following question: when was the last time a Carter administration official was right about the economy?

In stumping for the needed (though flawed) bailout bill yesterday, Harry Reid warned that an unnamed American insurance firm was teetering on bankruptcy. Those of us who cover Washington for a living have long since learned to ignore Harry Reid’s every utterance. Unfortunately everyone can’t afford to be so blasé. Reid’s idiotic comment has had a profound effect on both Wall Street and Main Street today. MetLife for one felt compelled to publicly declare they weren’t Reid’s endangered carrier. Fine good it’s done them. As of 12:15, their trading price had plummeted 10%.

Predictably, Reid’s comment has hammered the entire insurance industry, giving our economy one more major headache when such a thing was least needed. Now when I say this effect was predictable, I’m speaking only for people with common sense and not necessarily senate majority leaders. As of midday, here’s where the insurance industry carnage stood along with the corresponding financial loss:

MET down 10.7% or ~$3.6Bn

PRU down 3.8% or ~ $1.4Bn

AFL down 4.14% or ~$630mm

TRV down 3.75% or ~$950mm

As Harry Reid doubtlessly understands, the above figures just reflect the damage done to common stock. The story is similar when it comes to preferred stock. For those of you who prefer the big picture, the S&P 500 Insurance Index is down 4.5%, or $15 billion. Think of all the wooden arrows you could buy with that kind of chunk of change!

Such incidents leave me grasping for ways to understand the economic ignorance of much of our political class. Reid could have made the exact same point without referring to a specific industry, right? And he surely knows that the markets are a touch jittery these days, correct? And yet he said what he said.

At tonight’s debate, Gwen Ifil will probably give both contestants a chance to display their understanding of the present crisis. The contenders will pull this off with varying levels of skill. Hell, they may even do great. But as Harry Reid ably demonstrated last night, one can hardly overstate how poorly the political class as a whole understands complex economic matters.

From Ezra Klein’s blog comes this lovely“let them eat cake” gem from Robert Borosage, co-Director of the lefty activist group Campaign for America’s Future:

The bail out will take place simply to avoid that depression. But depressions have some salutary effects - the scoundrels go belly up, the weakest get purged. And, in the wake of the disaster, people demand strict regulation of the money lenders to keep their greed in check, and government spends money on the real economy to put people back to work.

Ah yes – the many wonderful “salutary effects” of a depression. I especially love the really macho stuff about the “weakest getting purged.” At the risk of providing Mr. Borosage with a clue, the “weakest” aren’t the guys at Lehman who were pulling down eight figures a year until a couple of weeks ago and whose comeuppance so obviously thrills Mr. Borosage. The weakest among us are those on the economic margins. While a depression might not “purge” them, it will surely hit them hardest. They’ll be the ones without jobs and without the means to heat their homes. Actually, those who are truly the weakest won’t have homes to heat.

But as Mr. Borosage would probably argue, you can’t make a delicious omelet of government hyperactivity without breaking a few eggs. It’s funny. Organizations like Campaign for America’s Future are supposed to care about the weakest among us. Perhaps they do. But obviously they care a whole lot more about their political agenda and ambitions.

So here’s the state of play as the Great Depression redux edges ominously closer. The Paulson Plan failed today, with a solid majority of Republicans voting against it. The opposition Republicans fall into two camps:

1) The Mike Pence doctrinaires who welcome a free market curative like a Depression for our current woes. I guess they view it as sort of the economic equivalent of that stuff you drink the night before a colonoscopy. As misguided as Pence and his minions are, they at least have a certain nobility complementing their foolishness. I would be remiss if I didn’t note that a significant subdivision of the Pence camp rejects the counsel of virtually everyone who knows anything about economics and instead believes that our current situation isn’t so dire. Call it conservative magical thinking.

2) A bunch of other Republicans who would have voted for the Paulson Plan had Nancy Pelosi not said some stuff that hurt their feelings just prior to the roll call. They had thought passing the Paulson Plan was an urgent national priority. Then, the Speaker said some stuff that made personal pique take priority. Outdumbing the Pence Republicans was a tall task – this coterie of GOP representatives was up to the task.

So what will happen? We’re in uncharted territory here, and I don’t want to tacitly posit an economic competence that I lack. However, the many people I’ve spoken with who do understand economics and our financial system are gravely concerned – all of them. The only place you can find people who aren’t gravely concerned are on Capitol Hill and in the media, the two places in our society where people are paid to offer opinions on things they know nothing about. Suffice to say that if our banking and financial system doesn’t recover its footing, the overwhelming consensus is that we’re headed for very rough times.

Here’s what’s been lost in the debate while people on both the right and left have offered ignorant jeremiads about “bailing out Wall Street.” If the economy tilts into a deep recession or even a depression, it’s not the wealthy or even Barack Obama’s cherished middle class who will pay the deepest price. In any such circumstance, it’s the people on the economic margins who get hurt the most. The ones without a nest-egg and without a 401(k) are the ones who have no safety net when they lose their jobs and health insurance. If unemployment goes from 6% to 10%, it won’t be the investment bankers who start heating their homes at 56 degrees in January. Populist rhetoric is almost always misguided. That has never been more the case than over the past week.

In case you’re looking for political ramifications, the news is not good if you’re of the Republican persuasion. As much as I would like to lay all of our forthcoming problems at the feet of the House members whose feelings Nancy Pelosi so easily bruised, they’re a bit player in this drama. A Republican occupies the White House, and the buck stops with him. It’s a Republican economy, and it’s a law of political physics that we will pay the price for its shortcomings.

In case you’re looking for ways forward, there are plenty out there. A few days ago, Bill Kristol linked to a provocative piece by Harvard professor Lucian Bebchuk that suggested the best way to recapitalize our faltering financial institutions would be via rights offerings backstopped by the federal government. Translated into English, this plan would address the financial system’s most urgent need – recapitalizing the financial institutions that need it – directly. What’s more, the recapitalization would come from shareholders, not taxpayers. It likely wouldn’t cost Joe Sixpack a red cent. It would also keep the federal government out of the banking business, a matter rightly near and dear to the hearts of libertarian leaning Republicans. And yet they never considered this plan, such is the state of their current non-constructive pose.

The Paulson Plan only addresses (or should I say addressed) the need for recapitalization indirectly, by providing the funds necessary by gobbling up presently undesirable mortgage backed securities. The Republicans could have spent the past two vital weeks coming behind a plan like Professor Bebchuk’s (or another one) assuming Paulson’s plan was unacceptable. Instead, they dithered. Some in the GOP obviously would rather have a Great Depression redux instead of taking the necessary steps to prevent it. Call it a twisted matter of principle. My point here isn’t to lobby for the Bebchuk Plan. My point is to show that there are potential solutions out there that the political class hasn’t seriously (or even frivolously) addressed.

There’s an opportunity here for the McCain campaign. Of course, there’s also an opportunity for the Obama campaign. Answers are needed, and lord knows the two senators have a big enough platform to provide them. But as far as Obama is concerned, his “prudence” by now is a known quantity. We won’t see any game changing propositions emanate from this preternaturally cautious politician. Obama lags events - he doesn’t lead them.

That leaves it up to McCain. Frankly, whether he can politically overcome a millstone the size of this economic crisis is questionable. Let’s face it – the financial meltdown is the equivalent of Mark Foley’s salacious instant messages on stilts. But there remains the matter of duty. House Democrats, House Republicans, Senate Democrats, Senate Republicans and the White House have all been unable to move the ball forward. Collectively, they’ve spent the past ten days squabbling over a badly flawed bill that even if passed may still not have saved us from a very deep recession or worse.

The only guy out there with the political juice to offer something new and get it seriously considered is John McCain. Even if he got a good bill passed, it might not be enough for him to win the election. But it would be his finest hour.

Radley Balko argues that our current mess isn't due to the failures of capitalism, but to a "corporatist socialism" abetted by the fiscal irresponsibility of the same elected officials who now want to "solve" the mess with more government.

If any private corporation employed the same accounting tricks Congress and the White House use to hide the government's massive debt and financial liabilities, its board and executive officers would all be in prison. In the government, it's common practice. And that's not even considering the funding of our two ongoing wars, which somehow emanates from outside the normal budget process.

If the government were required to abide by the same accounting standards as private industry, its debt would be in the trillions, not billions. Last May, Dallas Fed President Richard Fisher said that the government's unfunded liability for Social Security and Medicare alone comes to a staggering $99.2 trillion, or $330,000 for every man, woman, and child in the United States. It's an impossible figure.

So when congressional leaders and presidential candidates Sen. Barack Obama (D-Ill.) and Sen. John McCain (R-Ariz.) call for more government oversight of our struggling financial institutions, go ahead and laugh. You know you want to. The idea that the private sector would be in better shape today if only we demanded more oversight from our politicians is preposterous. Our politicians wouldn't recognize "fiscal responsibility" if it spat in their ears.

Wall Street moguls may be "greedy," as both John McCain and Barack Obama have described them, but at least there are real consequences when their greed becomes excessive. They go out of business.

He continues:

When you, Joe Citizen, spend frivolously and default on your loans, the bank takes your house. When the government spends your tax dollars frivolously, it simply cooks the books to cover its excesses. When the books are left in ashes, the government just takes more of your money, or it prints more money, leaving the money it hasn't already taken from you devalued. Over the last few weeks, we've learned that you now face the prospect of an additional indignity: When your neighbor's bank spends frivolously and defaults on its loans, the government's going to take your money then too, to keep the bank in business.

Please don’t construe what follows as an endorsement of the richly flawed Paulson Plan, but…

Over the years, we’ve all gotten accustomed to Democrats referring to every single spending boondoggle as “an investment.” You know the drill – we need to invest in infrastructure or we must invest in midnight basketball. Of course, such things were never investments but rather expenditures. Perhaps they were good expenditures and perhaps not, but they certainly didn’t qualify as “investments” unless you wanted to torture the definition of a well known term.

It thus comes as no small irony that the Paulson Plan which actually calls for literal investments is instead routinely referred to and calculated as pure expenditures in the media. Perhaps decades of John Kerry-types endlessly braying about “investments” in education or whatever other spending plan caught their fancy has hopelessly corrupted the language. Or perhaps some purportedly wise people really don’t understand the difference between investing and spending.

No one knows how long it will take the real estate bubble to fully deflate. But it will happen. It is happening. Here's a very hopeful data point from Washington D.C.'s outer suburbs.

In Prince William County, the number of residential sales in June, July and August was roughly double the comparable months in the summer of 2007. You can see the numbers here as well as comeuppance for an astonishingly inept bit of reporting in the Washington Post.

The sales are up because prices have collapsed, which is actually a sign of health for the housing market and a prelude to recovery. The median price for those 1,000 August sales in Prince William and the city of Manassas was $205,600, down 43 percent from the year-earlier median of $362,500 and a level not seen since 2003. See the complete data set here at the extremely informative Northern Virginia Housing Bubble Fallout blog.

David Frum does an excellent job puncturing Josh Marshall's hilarious contention that the Paulson plan is aimed at bailing out the "GOP's Wall Street Friends." Hardy-har-har.

For an even more laughable bit of partisan finger-pointing, see Jim Cramer's otherwise entertaining New York Magazine piece, "The Great Shakout." Writes Cramer:

How was all of this allowed to happen? Where were the regulators, the agencies that rate these bonds, the early warnings to the investors that maybe this paper was more dangerous than the brokerages let on? First, not only was there no regulation to speak of at any level—federal, state, or local—but the much-worshipped Alan Greenspan and current Fed chairman Ben Bernanke actually encouraged this kind of securitization even as they raised rates ever higher, seventeen times, to stop the very house-price appreciation these securities depended on to be viable. They shared the Republican ideology that promoted homeownership for everyone—including those who couldn’t afford it—and minimal market regulation. [emphasis added]

What's Barney Frank--chopped liver? Not to mention those famously Democratic hotbeds, Fannie Mae and Freddie Mac. See the comments that follow Cramer's piece for well-deserved hoots of ridicule.

Why take the trouble to invest my own time looking for stories on the financial meltdown, when Greg Mankiw has already provided a handy list this morning?

Also, see any number of good things posted by Arnold Kling at EconLog, especially the entry, "Delusions on Both Sides" ("Financial institutions thought that they were getting rid of risk, but instead they were just passing it around, as in the card game Old Maid") and the post on "systemic risk," to which it links.

In a discussion of panicked investors pulling money out of 401(k) accounts, and subjecting themselves to the 10 percent penalty attendant on such early withdrawals, the Wall Street Journal this morning quotes Massachusetts Secretary of State William Galvin, who would like to see Congress eliminate this penalty:

Mr. Galvin said relief for individual investors is especially appropriate given the $700 billion bailout fund being proposed to aid financial institutions in the crisis. "If we are providing amnesty to financial services," then "we ought to provide a few breaks to these people."

It used to be the case that ambitious politicians prefaced every argument with the phrase, "If we can put a man on the moon . . . " For years--perhaps decades--to come, they will use some variation on the formula above: "If we can bail out Wall Street to the tune of $700 billion . . . " Trust me, you're going to be hearing this a lot.