The word "credit" essentially means "belief".
If I extend you credit, what I'm really saying is that I'm giving you money because I believe you'll pay me back.
That belief is at the heart of the crisis right now. The media pre-occupation with the stock market indexes is not entirely wrong-headed, mind you, because as I've said before, they're the leading indicator of how the economy is reacting to whatever else is going on in the world.
But the heart of this crisis is still not truly a stock problem. It's a credit problem.
All of the bailout proposals, from the original idea of getting bad paper off the books of banks to this week's darling notion that the G7 governments should re-capitalize key banks and take ownership stakes in exchange for the money, are geared toward solving that problem, toward reinstating the belief that Bank A, borrowing from Bank B, will be good for the money.
What the markets are reacting to is partially the failure of various financial corporations and the assumption that more will fail and partially the failure of other credit-dependent industries, like housing and automotive. Companies in these industries are components of the various indexes, so as people flee those specific investments, indexes fall.
The market is also reacting to the idea that a recession, or worse, is now inevitable. Investors are "pricing in" a recession, battening down their hatches, finding relatively unrisky places for their money.
And then lastly, of course, there's the overall, purely psychological, panic-driven capitulation that's going on. Many investors are simply "giving up" on the market, spooked by the drop in the indexes. They're liquidating anything that's tied to the stock market at any price they can get, just to get out. It's that purely herd-like stampede that's really killing the markets right now.
In times when belief is in short supply, believable leaders are needed. And there's a painful lack of them right now. Bush and Paulson, for example, are widely seen as being partially culpable for getting us into the mess in the first place. There's not a lot of belief that they can get us out of it. Bush going on the air and saying, "We'll fix it. We'll take aggressive action. Trust us!" doesn't really help, because, let's face it, there has yet to be an instance of Bush taking aggressive action in any context that didn't end up being an utter bungle.
This is actually a dangerous moment. It's important to remember that most extremist movements succeed in taking power by providing that credible-seeming leadership at the moment when everyone's looking for it.