But, says Dominic Konstam, Credit Suisse interest rate strategist, the current crisis is worse than the LTCM episode. Then, "you could identify the problem, ring-fence it and basically deal with. You could identify the illness and prescribe the right cure."

"Now, nobody knows where the problem lies other than there was too much of a good thing" in terms of leverage, he continues. It isn't just subprime mortgages and leveraged-buyout lending. The technology of the CDO market and transmission of that risk to the ABCP market are what allowed the bubble in the securities market to take place. "It all adds up to an awful lot of leverage in the system."

Once confidence is lost, leverage is a deadly weapon, Konstam says. To unwind the leverage, "you need to transfer assets to a 'real money' guy, who's nervous and only is willing to buy at a rock-bottom price. And then only today. The next day, the bid might not be there."

Anxious customers jammed the phone lines and website of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.

Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable. And federal regulators said they weren't alarmed by the volume of withdrawals from the bank.

The mortgage lender said it would further tighten its loan standards and make fewer large mortgages. Those moves could make it harder to get a home loan and further depress the housing market in California and other states.

The rush to withdraw money -- by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company -- came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown.

The parent firm borrowed $11.5 billion Thursday by using up an existing line of credit from 40 banks, saying the money would help the lender meet its funding needs and continue to grow. But stock investors, apparently alarmed that the company felt compelled to use the credit line, sent Countrywide's already battered stock down an additional 11%.

At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early '90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names.

For Joe Mason, an economist and professor of finance at Drexel, the 30-day window is not long enough.

"[Lenders] are going to have to roll that over in 30 days, max," he said. "The problems will take a lot more than 30 days to work out."

Mason also cited Bagehot's rule, a basic banking principle which he explained as the need to distinguish between illiquid and insolvent organizations. "You want to lend to illiquid but not insolvent institutions," he said. Lending to insolvent institutions just enables them to dig themselves an even deeper hole.

To him, that's what seems to be happening.

"I would argue that Countrywide is insolvent. Their only asset is their pricing platform, their business algorithm, and that's not working. The next biggest asset they have is the toner for their copiers."

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again at record levels. Actual New Home inventories are probably much higher than reported - some estimate are about 20% higher.

This represents a supply of 7.5 months at the current sales rate.

This is another weak report for New Home sales. And the data for July is pre-turmoil. These numbers will probably be revised down, and the in-turmoil numbers for August will likely be much lower.

David Rosenberg, chief economist at Merrill Lynch, said it was hard to combat a deflating credit and asset bubble. He said that while markets soared when the Fed cut rates by 50 basis points in January 2001, they soon fell back.

The S&P 500 closed at 1,276.05 on January 2nd, 2001. The Fed cut rates 50bps on Jan 3rd. The S&P 500 closed at 1,347.56, up 5.6% for the day. Then the market started to sell off, falling almost 20% by March. Rosenberg is correct (doesn't mean history will repeat).

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
# China threatens `nuclear option' of dollar sales

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.