It would be hard to explain. Briefly, bankers know the uncertainty of their debt now, and lack confidence in their underlying value. It is a crisis of confidence. As a result, inter-bank lending virtually ceased starting last week. This loss of circulation of capital will cause defaults in commercial lending and breaking of covenants (contracts), which will then trigger penalty clauses including increased costs and asset forfeitures. Within about three weeks, the cascading effects will be so impressive (and visibly compounding) that all global banks and creditors will have doubts about where it will end. Then, there will be a day very soon thereafter when our Treasury will try to perform its regular auction of our debt to the institutions that traditionally accept our I.O.U. (e.g. the Bank of China), and on that day, the investors will take a wait-and-see approach (kind of like you) instead of buying the full offering (which NEVER happens). And that day will be the last day of our economy as we know it. Because even though our government has no money, it has had the ability to borrow what it needs, and that’s what makes us solvent. But the day those securities don’t FULLY sell is the day the Unites States is declared bankrupt.
I am simplifying here. The workings are complex and intricate beyond anybody’s ability to manage. But the problem here is quite simple and quite real: bad mortgage debt is so large and thus far sufficiently bottomless that bankers have lost confidence. Shortly, if something dramatic doesn’t change, that problem of confidence will spread more broadly. And for better or worse, the highly leveraged nature of our economy (and the global economy at large) is predicated upon confidence; without it, the system dies.
By my estimate, there’s a 90% chance that, barring major macroeconomic action, this catastrophic collapse will happen in under 6 weeks, and may happen in as few as two weeks. But that’s just me (and Ben Bernanke, and Hank Paulson, and other people more familiar with how our economy works than me).