The financial crisis is not over. If things were back to normal, banks would be lending to each other and to businesses and individuals. But measures of bank lending risk suggest fear is 12 times as high as it would be in normal times. The reason? Banks know more than you do about what's wrong. And they're not talking about it because they don't want you to withdraw your deposits and sell your stock. What they know is that on October 21st, some of the biggest players on Wall Street could be required to come up with $400 billion that some may not be able to pay.

Last month, the White House decided that we could afford to let Lehman Brothers file for bankruptcy. That proved to be an enormous mistake. It triggered a run on money market funds because one of the oldest such funds, Reserve Primary, broke the buck since it held Lehman Brothers paper. The U.S. responded with a $50 billion guarantee of money market funds. But the biggest consequence of that mistake is in the $54.6 trillion market for Credit Default Swaps (CDSs).

A CDS is like selling insurance on your car to hundreds of people who don't own it -- yet if your car goes up in flames each of those people collects the full value of your car. More specifically, CDSs are insurance against a bond or loan default. Why are CDSs so dangerous? Three reasons: a CDS seller does not need to put any capital aside to cover losses if the security defaults, the buyer doesn't need to own the asset it wants to protect, and there is no central place where information about all these CDS deals is collected and updated.

This morning markets in Asia fell about 4% -- a relatively muted response to the 7% drop in the Dow Monday. Should we trust our increasingly fragile global financial system to the 73-year old gambler who claimed a victory in yesterday's failed vote on the bailout bill? One poll suggests that the answer is no.

A September 29th Gallup poll found that Americans have the least trust in the Administration's ability to handle this financial crisis and the most in Senator Barack Obama (D-IL), 47. Here is the percentage of Americans who approved of how various people were handling the economic crisis:

• Barack Obama (46%)
• Democratic congressional leaders (39%)
• John McCain (37%)
• Republican congressional leaders (31%)
• Hank Paulson and George Bush (28% each)

Senator McCain, a former POW, gambled on taking money from corporate interests, on appointing Sarah Palin as vice president, and on choosing Phil "Americans are Whiners" Gramm as his chief economic advisor -- the same guy whose bill to deregulate the Credit Default Swap (CDS) market helped get us into this financial catastrophe.

Our national decision is less than six weeks away.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The New York Times reports that Morgan Stanley (NYSE: MS) CEO John Mack approached Citigroup head (NYSE: C) Vikram Pandit on Wednesday about a merger. It quotes Mack as saying "We need a merger partner or we're not going to make it." Fortunately, Citi rejected Mack's advances -- I say fortunately because Citi has enough problems of its own without taking on Morgan Stanley's. Why is Morgan Stanley, which just posted a $1.43 billion profit, in such desperate straits?

It's a brilliant negative feedback loop that short sellers are exploiting to enrich themselves as Wall Street collapses. Here's how it works: the hedge funds sell the stock of 'Bank A' short -- borrowing the shares at a higher price and hoping to pay back the stock loan with shares repurchased in the market at a lower one. As the Wall Street dominoes tumble, investors ask who's next and they sell the shares of the next domino to fall.

That decline leads ratings agencies to lower their debt ratings on a bank which boosts the rates it pays in the $62 trillion market for Credit Default Swaps (CDSs). Those higher rates force 'Bank A' to come up with billions in cash which it doesn't have -- raising fears of a collapse and further depressing 'Bank A''s stock price. And the cycle begins anew until 'Bank A' finds a merger partner or goes bankrupt. This short-selling work is very profitable, but it is also destroying the global financial system.

Last weekend, the U.S. government decided that it would let Lehman Brothers Holdings Inc. (NYSE: LEH) fail -- leading to history's biggest bankruptcy -- valued at $639 billion. But that was fine because the government said that people knew Lehman was in trouble. Of course, people also knew since August 2007 that Bear Stearns was in trouble, but that didn't stop the government from forking over $29 billion of taxpayer money to bail it out. And people knew for years that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were in trouble -- but that did not stop the US from pledging between $200 billion and $800 billion to nationalize them.

But this morning, we discover that the government has crossed over the line in the sand it drew over the weekend -- it will loan $85 billion of taxpayer money -- at a variable interest rate starting at 14.5% -- Libor, which doubled yesterday from roughly 3% to 6%, plus 8.5% according to the Wall Street Journal [subscription required] -- to avoid what would have been the $1 trillion bankruptcy of American International Group (NYSE: AIG). In exchange for this two year loan, according to the New York Times, the Fed gets as collateral all the $1 trillion of AIG's assets plus warrants to purchase 80% of AIG stock.

The incompetence of this government is breathtaking. On Sunday, it could have loaned AIG $40 billion to keep its credit rating from getting downgraded. It refused to do so -- trying to force JPMorgan Chase (NYSE: JPM) and Goldman Sachs Group (NYSE: GS) to help raise private financing -- and credit agencies went ahead and downgraded AIG on Monday. Now, instead of a bridge loan which would have tided AIG over until it could sell some assets to raise capital, the government is making a two-year loan that is twice as big. And we, the taxpayers, are likely to own this pile of assets that may be worth far less than the $1 trillion stated on its books. If there's any good news, the stated collateral is more than 10 times the amount of the loan.

Lurking in the background of this weekend's collapse of two of Wall Street's biggest names, is a $62 trillion segment of the $450 trillion market for derivatives that grew huge thanks to John McCain's chief economic advisor, Phil "Americans are Whiners" Gramm. That's because in December 2000, Gramm, while a U.S. Senator, snuck in a 262-page amendment to a government re-authorization bill that created what is now the $62 trillion market for credit default swaps (CDSs).

I realize it is painful to read about yet another Wall Street acronym, but this is important because it will help you understand why the global financial markets are collapsing. And it will give you information to consider when you vote in November. CDSs are like insurance policies for bondholders. In exchange for a premium, the bondholders get insurance in case the bondholder can't pay. As I posted, in the case of the $1.4 trillion worth of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) bonds, the government's nationalization last Sunday triggered the CDSs on those bonds. The people who received the CDS premiums are now obligated to deliver those bonds to the ones who paid the premiums.

Gramm's 262-page amendment, dubbed "The Commodity Futures Modernization Act," according to Texas Observer, freed financial institutions from oversight of their CDS transactions. "Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of [CDSs]-which in theory insure the banks against bad debts-those risks are passed along to insurance companies and other investors," wrote Texas Observer.

The New York Times reports that Wall Street investment banks -- including UBS AG (NYSE: UBS); whose vice chairman, Phil "Americans are Whiners" Gramm resigned as chief economic advisor to John McCain -- have been helping foreign hedge funds dodge U.S. dividend taxes. The good news is that the amount of lost taxes looks to be in the "mere" hundreds of millions -- a tiny amount when you consider the record $490 billion deficit we face for 2009.

The tax dodging scheme -- dubbed "dividend enhancement" -- is complex and UBS was not alone in pushing it. The New York Times reports that Morgan Stanley (NYSE: MS), Lehman Brothers (NYSE: LEH), Deutsche Bank (NYSE: DB), Merrill Lynch & Co., Inc. (NYSE: MER) and Citigroup, Inc. (NYSE: C) joined UBS in this scheme to sell complex financial products that enable offshore hedge funds who get dividends from U.S. stocks to dodge the 30% dividend tax.

But UBS is continuing to look more and more like a shady enterprise. First, it gained notoriety for its brazen policy of dumping Auction Rate Securities (ARS) from its own books into the accounts of its unsuspecting "private banking" clients. It has since settled those charges. And now it stands accused of helping a hedge fund, Maverick Capital, bilk the U.S. government of "$95 million in dividend taxes from 2000 through 2007," according to the Times.

This week, state investigators from Massachusetts and New York revealed more pieces of the scam that was the $330 billion ARS market. Up until this week, it had been known that UBS AG (NYSE: UBS) had told its brokers to dump this toxic waste on its so-called private clients -- individual investors -- to keep UBS from needing to write it off from its own books.

But this week we learned that banks had been colluding for as long as two years to prop up the weekly auctions that were supposed to set the rates on these securities. It looked like there was good evidence that the banks were committing securities fraud when they sold ARS on the premise that they were cash-like and offered slightly higher yields than money market funds. Why the fraud? Because, their internal e-mails and behavior revealed that they were desperate to get rid of the toxic waste.

Moreover, those e-mails show that the banks' claim that the auctions suddenly failed in February 2008 is another fraud. As I posted, Merrill Lynch & Co. (NYSE: MER) e-mails reveal that the auctions started failing in January 2006. And it was public knowledge, according to Financial Week, that ARS auctions were failing last September -- 60 such auctions failed to the tune of $6 billion.

Giving some thought to what in the world Mr. Gramm was thinking about (or not), it seems to me that his angst last week about Americans being a bunch of whiners was quite self referential. He obviously has lost his sense of balance and is spending too much time with the country club crowd to realize that some folks are feeling true pain.

Unless he is getting free gas or his limousine driver is not speaking with him then how could he have missed the fact that everyone in our country has seen a rapid and significant rise in prices. Ask anyone driving a truck for a living, just as a sampling. I would not consider their plight frivolous.

For some reason he has also missed the fact that all three of our major automobile manufacturers Ford Motor (NYSE: F), General Motors (NYSE: GM), and Chrysler (now privately held) are teetering on bankruptcy.

I have been fortunate enough to have traveled to the four corners of the United States, Alaska and Hawaii and I would actually say we tend to be overly optimistic at times in the US. By comparison many of the 25 countries I have had the chance to visit can be some what negative. I would place us somewhere in the middle.

The Washington Times reports that Phil Gramm, UBS AG (NYSE: UBS) vice chairman and senior economic advisor to John McCain (R.-AZ), thinks we're a nation of whiners. Gramm's UBS is a leader on three important fronts in the effort to destroy the U.S. economy: the $1.3 trillion subprime mortgage catastrophe, the $330 billion Auction Rate Securities (ARS) freeze, and a tax evasion scheme of unknown magnitude.

The Washington Times quotes Gramm as saying: "We have sort of become a nation of whiners. You just hear this constant whining." UBS probably pays Gramm well for his services so I can see where he's coming from. He is making money and he's the only one who matters. But if you think he is helping McCain, think about these things:

I recently wrote a piece about how being more environmentally conscious can be great for your heart and health without hurting your pocketbook. Now SmartMoney's Kelli Grant has some great tips for going organic on a budget. Her five tips include setting priorities (buy organic where it really matters), consider your alternatives, buy on sale, buy from local farmers, and try generic brands.

But there's another side to this: One of the main culprits of the obesity epidemic is the wide availability of inexpensive, empty calories. Hostess cupcakes anyone? As former Senator Phil Gramm put it, "Has anyone ever noticed that we live in the only country in the world where all the poor people are fat?"

So buying organic foods, even if it does cost more, might be good for you. It could help you eat less! I would wager that if the average American kept their grocery budget the same but switched to organic foods, our collective waistline would shrink pretty substantially.

So remember: When it comes to food, paying a little more might be better for you.