I'm not sure most people grasp the sheer scale of the current crisis. This may help.

First, there is the shadow banking system (see the estimate of its size below relative to other big things...). NOTE, estimates can be even much larger than this.

In short, it's the massive pile of derivatives accumulated over the past decades. It's also tightly coupled and extremely complex (worse, not understood). It isn't regulated, nor is it liquid enough to price (which is why global banks are still able to "act" like they are solvent). Granted, this is the notional value rather than market value, but in uncertain times market values and notional values can converge.

The best way to view the shadow banking system is as a financial amplification system. A byproduct of its operation is that it can take small financial events and convert them into financial nuclear weapons that explode with a spectacular display and devastating effect. Worse, since the entire global economic system is deeply turbulent, we can expect to see more financial nuclear explosions than ever before as the shadow banking system amplifies an increasing number of small and unexpected events into disasters.

Next, there is the global economy.

Finally, there is the US economy.





You can see why global banks are now trading at prices that anticipate insolvency and government bailout ( See this chart from JP Morgan for more). And why the UK looks like Iceland more each day.

NOTE: fixed the circles.