Soon the Bank of England was pumping money in just one day after warning others, in the name of "moral hazard" rules, not to bail out lenders who had engaged in irresponsible practices.
A Wall Street insider told me: "A century ago, the depth of a banking crisis was measured by the length of the queue outside banks. These days, financial panics are more likely to be played out through heavy selling in share, bond or currency markets than old-fashioned bank runs."
The UK government was forced to rescue Northern Rock after it collapsed [AFP]
The bankers knew how bad it was. Here is Jim Glassman of JP Morgan: "The credit-market storm is a far more dangerous thing that anything we've seen in memory."
More and more news reports were glum. Here is the Sydney Morning Herald in Australia reporting on "How Bad Debt Infected the World": "The foreclosure butterfly flapped its wings in small town USA and the hurricane built and tore through world banking."
In many countries, angry critics blamed the US for exporting a form of "financial Aids" worldwide.
Luiz Inacio Lula da Silva, the Brazilian president, blamed "white men with blue eyes on Wall Street".
"I believe there is a systemic debt problem and it will take years to work out - and the Federal Reserve cannot resolve the issues," said Richard Bove, a bank analyst at Punk Ziege.
Michael Bloomberg, the mayor of New York City and a financial guru, also said the causes went deeper.
He believed the global credit crunch had as much to do with public debt as the US sub-prime meltdown. The billionaire media and business mogul talked about the "lunacy" of debt levels in the US and the UK at the Conservative Party conference in Britain.
"This is not a mortgage crisis," Bloomberg insisted, "It's a crisis in confidence and we're all in it together."
Bail outs
Washington responded with interest rate cuts and the injection of billions into banks, along with similar stimulus efforts by central banks in other countries.
Despite this, the credit markets remained locked and the problem remained unsolved. Businesses closed, some went bankrupt and jobs were cut.
In March 2008, Bear Stearns became the first of the big banks to go down. Others followed and many, like insurance giant AIG, had to be bailed out.
"As recession was officially recognized in the US, American consumers stopped trekking to the malls, sinking our consumption-based economy even further"
