Brazil's former President Lula da Silva at a news conference after a meeting with Governor Pezao in Rio de Janeiro. Thomson Reuters Brazil has lost it, and not because its economy is in the throes of a recession.

Brazil has lost it because it seems as if everything it has known about itself for the past 15 years is dead, and one recent event has crystallized that confusion: the detention of former President Luiz Inacio Lula da Silva.

Pro-Lula protesters gathered outside of his home and federal police headquarters in Sao Paulo after his arrest. And why not? Lula was the country's golden boy. The leader who got along well with both the US and Venezuela's Hugo Chavez. The man who brought millions out of poverty and embodied a modern Brazil that had the potential to live up to its motto "order and progress."

On Friday he was arrested and questioned by the police for three hours, finally implicated in the scandal that brought the country to its knees back in 2014. The authorities in the sting called it Operation Car Wash.

Operation Car Wash is an investigation into corruption at Petrobras, Brazil's quasi-state-backed oil company. Starting in March 2014, the investigation started to conclude that Lula's ruling party used the company as its own personal slush fund. (Think brief cases of cash exchanged, kickbacks, luxurious international travel.)

The scandal had all the hallmarks of a third-world country that, Brazilians (and many global investors) thought, Lula had helped Brazil move past.

But not so.

"There is evidence that the crimes enriched him and financed electoral campaigns and the treasury of his political group," authorities said after his detention.

Brazilian President Dilma Rousseff next to former President Luiz Inacio Lula at a campaign rally in Sao Paulo. Thomson Reuters

'FORA!' (That means, 'OUT!')

Political chaos is the last thing Brazil needs during economic hard times. Brazil's gross domestic product is expected to contract 3.5% in 2016; inflation has hit almost 11%.

But political chaos is what Brazil has. Last weekend President Dilma Rousseff (who belongs to Lula's Workers Party) had a nasty shock when the head of her party and his wife admitted to taking bribes.

"While authorities are still digesting this information, this clearly brings the scandal substantially closer to the President and Vice President," analysts at ACG Analytics wrote. "The chances for impeachment or a determination by the Supreme Electoral Court invalidating the results of the 2014 elections are increased by this development."

That would be true chaos. What's more, the opposition isn't in a great position either. Eduardo Cunha, the head of Rousseff's opposition and leader of Brazil's lower legislative house, started impeachment proceedings against the president back in December.

The thing is, Cunha is also being investigated for corruption associated with the Petrobras scandal.

With Lula's arrest, Rousseff is fighting for her life with her allies as well. The PT wants to return to its values. It wants Rousseff to forget belt tightening and budget cuts and use stimulus to get the economy going again. As Bloomberg points out, though, Rousseff's more market-friendly allies in the legislature don't want that.

You can't please both those parties. In fact, in Brazil it may be that you can't please anyone right now.