Here's a good read from Forbes:
http://www.forbes.com/businessintheb...ml?partner=rcp
Essentially, banks are no longer lending to each other in the kind of ordinary day-to-day transactions that grease the economy, since they're suspicious of which bank(s) may fail & leave the lender holding the bag while things get sorted out.
"There was already a sense that the plan would not be enough to break the log jam in the credit markets, where banks are even refusing to lend to each other. Earlier Monday the Federal Reserve raised the amount of swap lines it has with foreign central banks to $650 billion from $290 billion. It also announced bigger and longer-term auctions totalling more than $400 billion, but the credit markets remained stuck."
Meanwhile, Chinese banks have been told to stop lending to their counterparts in the US:
http://www.reuters.com/article/compa...16693720080925
(Granted, these are Chinese commercial banks, not the Chinese central bank. If
that bank stops lending to us, we're in fairly deep shit - the interest rates on T-Bills would have to rise pretty substantially, cooling things further, the proverbial "double-whammy".)
I'm not acting as Hank Paulson's agent here, but in lieu of the $700B package whatever effort does emerge needs to address some very large issues.