SO -- I've been out of touch the past few days. I left Friday to spend the weekend in sun-streaked Somerset, Mass. with the girlfriend's family, watching pro sports and eating delicious homemade meatloaf¹. Vaguely I heard, through the meatloaf haze, that Congress had reversed itself on the "bailout" for reasons I still haven't quite wrapped my head around. I gather they involved "sweeteners."² Anyway, I completely missed the Vote that Cured Wall Street and Saved America, so I guess I was less surprised than some of my contemporaries when I wandered out of Stat 100 this morning and saw:

NEW YORK (AP) -- Wall Street is plunging, with the Dow Jones industrials down more than 500 points amid growing fears that the credit crisis is spreading around the world.

Investors are realizing that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze credit markets, and many banks are still having difficulty gaining access to cash. European governments also took steps over the weekend to limit the damage from the growing global financial crisis...

...World markets suffered massive losses Monday, striking four-year lows, as panic-stricken investors doubted whether a Wall Street bailout package would stem the global financial crisis.

London, Frankfurt and Paris all tumbled more than six percent approaching the half-way mark while a 15-percent dive in Moscow forced a halt to Russian trading...

...Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.

The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.

Good job everybody! Time for a well-deserved vacation!

I have been telling my friends for a while -- and I'm increasingly convinced myself -- that the "bailout" is wrongheaded NOT JUST because it's a humongous transfer of wealth from the public to the financial elite, but also because it misses the core of the economic problem. The "bailout" is all well and good if the banks and other institutions are jammed up because of liquidity, i.e. their assets are tied up in this bad paper that nobody wants, and if the gov't takes it all then cash can flow again. But what if the problem is not liquidity but solvency, i.e. they've been operating on imaginary money and fancy bookwork this whole time, and a lot of these institutions just fundamentally have more liabilities than assets? In that case, the "bailout" does absolutely nothing to assure anyone that the system can meet its obligations. Increasingly it seems like that's the case -- in which case, we're in much deeper trouble than Paulson, Bernanke, Bush, Congress, or anybody in power seems willing to recognize.

Here is the article that got me thinking about the solvency/liquidity issue. Also, Nouriel Roubini -- who's been completely right about this entire thing since 2006 -- has been making this argument, as have some others, for quite a while.

Next weekend I'm leaving again, this time for Canadian Thanksgiving. If past experience is any indication, Congress or the Fed will do something SUPER-AWESOME over the weekend which will undoubtedly fix the problem, at taxpayer expense (again). And on Tuesday when I return, I'm just going to assume Wall Street will have burst into flames, or something. Just how much closer to systemic collapse can we get before everything tips over -- or at very least, until somebody important recognizes the problem?

1. RECIPE TIP: next time you make meatloaf, put some FRENCH'S brand french-fried onions on top. Mmm, crispy goodness!

2. Congress' "sweeteners" couldn't possibly be as SWEET as FRENCH'S brand french-fried onions! Add that onion crunch to your salad, soup or stir-fry today!