How Bad Could Things Get?

Your cheery upbeat forecast, on a day when stocks are up 3%, comes from Willem Buiter:

If the markets fear that the nays have thrown their toys out of the pram for the long term, the following scenario is quite likely:
* The US stock market tanks. Bank shares collapse...
* CDS spreads for banks explode, as will those of all highly leveraged financial institutions. Credits spreads generally take on loan-shark proportions, even for reputable borrowers...
* No US bank will lend to any other US bank...
* Assets not viewed as toxic before will become unsaleable at any price...
* Banks will stop providing credit to households and to non-financial enterprises.
* Banks will collapse... No bank will be safe, not even the household names...
* Households and non-financial businesses revert to financial autarky, among wide-spread defaults and insolvencies.
* Consumer demand and investment demand collapse. Unemployment shoots up.
* The government suspends all trading in financial stocks until further notice.
* The government nationalises all US banks and other highly leveraged financial institutions...
* We have the Great Depression of the 2010s.

And that assumes, of course, that the clearing and settlement system suffers no major blows, and that the US government retains its triple-A credit rating and can borrow from abroad at will.

Maybe we should send Buiter to Capitol Hill to put the fear of God into lawmakers. Bush's "this sucker could go down" doesn't seem to cut it.