The economy and banking system run on credit, much of it short-term in nature. Untold billions of dollars change hands each day to fund U.S. banks' operations and the workings of companies and local governments.
If that money stops flowing, the economy loses the lubricant that keeps the gears turning.
In normal times, for example, one bank may have a large need for cash just for a day or two. Other banks may have excess cash and are happy to lend it to peers at relatively low interest rates.
In recent weeks, that back-and-forth flow of credit has been badly hampered as banks increasingly have been unwilling to lend to one another, fearful they won't be repaid if financial conditions worsen.
"What credit really is is trust and faith," said Pimco's Gross. At the moment, he said, "there is no trust, there is no faith."
Why now?
Soaring mortgage defaults and plummeting real estate prices have been rocking the financial system for the last year, resulting in massive loan losses for many banks and other institutions that fed the housing mania earlier this decade.
But the fallout from the mortgage debacle reached epic proportions this month, beginning with the government's takeover of ailing mortgage-finance giants Fannie Mae and Freddie Mac on Sept. 7.
That was followed by the failure of brokerage Lehman Bros. Holdings Inc. on Sept. 14, and the Federal Reserve's rescue of insurance titan American International Group on Sept. 16.
On Thursday, federal regulators seized Washington Mutual Inc. in the biggest bank failure in U.S. history.
And Friday, shares of Wachovia Corp., one of the nation's biggest banks and mortgage lenders, dived 27% as many investors fled, fearing that it could be the next institution to fail.
"This is scary," said 75-year-old Dan Fuss, who manages $110 billion in bonds for investment firm Loomis, Sayles & Co. in Boston. "Right now, when you think this through, any bank . . . is at risk" of the market's instant judgment of which institutions are solvent and which are not, he said.
The Federal Reserve and other major central banks have flooded the global financial system with hundreds of billions of dollars in short-term credit this month, trying to calm nerves and get banks to begin lending to one another again.
But the Fed can't force banks to extend credit, least of all when the most primal of instincts -- self-preservation -- rules the day.
