It seems that banks are now so afraid that their counterparts are insolvent, that they are not accepting letters of credit from other banks. This is a bit like a bank refusing to cash a check because the check draws on the account of another bank.
This is bad, because letters of credit are used as part of shipping goods around the world and within countries.
When letters of credit start failing, goods stop moving. Imagine not being able to buy food at your local store because it is empty, and not being able to drive to another because the gas station is also empty.
That is the logical end point for what is happening now.
Let us hope that the desire to make money keeps enough credit going that everyday life is not too badly impacted.
For more information, see:
http://www.nakedcapitalism.com/2008/10/international-trade-seizing-up-due-to.html
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