Couldn't find a more apt thread for this scary scenario. Also thought the following excerpt from Galts's Speech was quite an appropriate prologue to the piece that follows which I found on a blog..

"What is the nature of that superior world to which they sacrifice the world that exists? The mystics of spirit curse matter, the mystics of muscle curse profit the first wish men to profit by renouncing the earth, the second wish men to inherit the earth by renouncing all profit. Their non-material, non-profit worlds are realms where rivers run with milk and coffee, where wine spurts from rocks at their command, where pastry drops on them from clouds at the price of opening their mouth. On this material, profit-chasing earth, an enormous investment of virtue—of intelligence, integrity, energy, skill—is required to construct a railroad to carry them the distance of one mile; in their non-material, non-profit world, they travel from planet to planet at the cost of a wish. If an honest person asks them: 'How?'—they answer with righteous scorn that a 'how' is the concept of vulgar realists; the concept of superior spirits is 'Somehow.' On this earth restricted by matter and profit, rewards are achieved by thought; in a world set free of such restrictions, rewards are achieved by wishing.
"And that is the whole of their shabby secret. The secret of all their esoteric philosophies, of all their dialectics and super-senses, of their evasive eyes and snarling words, the secret for which they destroy civilization, language, industries and lives, the secret for which they pierce their own eyes and eardrums, grind out their senses, blank out their minds, the purpose for which they dissolve the absolutes of reason, logic, matter, existence, reality—is to erect upon that plastic fog a single holy absolute: their Wish.

Worst Case Scenario
Fannie and Freddie in the lap of the U.S. Treasury
By Bill Holter
Monday, September 08, 2008

We
are now entering uncharted territory. The government seizure of FNM and
FRE opens up the next and terrifying chapter of the credit crunch. As I
have posited many times before, this has NOW ENDED UP IN THE LAP OF THE
U.S. TREASURY! The Treasury is now the backstop to all things paper.
This will be a real life "Atlas shrugged". There are huge implications
to this step. The Treasury will now have between $5-6 Trillion of
mortgage loans added to its balance sheet. The Treasury is in a huge
deficit already to the tune of $10 Trillion of funded liabilities and
over $70 Trillion of unfunded future liabilities. It is over. The U.S.
Treasury is broke. This will take the entire banking system with it.
The banking system will need to writedown $36 Billion of Fannie and
Freddie preferred stock that is carried as core capital. This means at
a 6% reserve ratio, that another $500 Billion of credit must be
withdwrawn to keep capital ratios from collapsing. The Treasury
stimulus plan was $140 Billion [remember those $600 checks]. Now 3
times that amount will have to be withdrawn from the credit pool unless
Treasury doesn't magically credit these banks with $36 Billion.

There is no telling how much the carried loans are really worth
in todays market as even prime loans are only fetching .80 cents on the
Dollar. This will cost at least $1 Trillion at a minimum for starters.
It will all be printed. The credit rating of the U.S. will be
downgraded, the interest rates the Treasury will now have to pay will
increase substantially. This is so Dollar negative it goes beyond words
to describe it. The borrowing ability of the Treasury is now being
hamstrung by the same credit crunch that we were assured last Sept. was
"contained". I'm sorry but the ruse is over. A government running a
deficit can only do two things to cover the gap, borrow more or print.
They can't raise taxes because that will implode the economy even worse
than it already is. They will find it more and more difficult to borrow
the sums needed until the auctions begin to fail. Then the "black
helicopters" will be out in full force spreading freshly printed
Dollars. The dilutive effect to the Dollar will be astonishing. We are
entering the Weimar Republic phase. The Treasury will be crushed under
debt and the Dollar [Fed] will be crushed through overissuance of new
currency used to buy the Treasury debt.

Basically look at it this way, Fannie and Freddie were both
having difficulty borrowing in the credit markets, they have a huge sum
to refinance between now and Oct. 1, something aproaching $200 Billion.
That debt could not be raised. If an auction failure occured, a panic
would be immediate. So Treasury steps in to save the day. Now it is
only a matter of time before the market place disciplines the Treasury
by requiring higher interest rates. Once rates start to rise, questions
start to arise. Questions about the credit worthiness of the Treasury,
questions about how much added money supply was used [remember two
years ago the Fed discontinued reporting M3 money supply]. Questions
that no one would ever ask before. Real questions!

The game of chicken that foreigners have been playing with
their $ reserves will come to an end. Someone will flinch. The worlds
banking system primarily uses Dollars for its reserves. The other
currencies used as reserves, Yen, Pounds, Euros, etc. also use Dollars
as reserves. Countries are using each other as reserves in a never
ending circle of falsely created values. Think of it this way, it is
like two people trying to hold each other up off the ground at the same
time without either touching the ground. There is no backing or
foundation to any currency nor to any banking system worldwide. The
last semblance of support was knocked out from under the system back in
Aug. 1971 when Nixon closed the Gold window. Who will be first to sell
Dollars? Who will be next? Who will be the first to flinch in this game
of chicken? I have no idea, but when the $ selling starts it will
snowball. It will probably destroy the entire worldwide banking in less
than two weeks time once it begins. Markets will close for unspecified
amounts of time, distribution, trade, travel, will all cease for
unspecified amounts of time. Foodstocks will be wiped out in a week or
less. This will change the world as we know it.

This is it. This is what everyone knew all along had to happen.
This is what no one ever wanted talk about. We always knew that we
couldn't spend more than we produced forever. This is what has happened
to EVERY country and EVERY society that used FIAT paper for CURRENCY
since the beginning of time. Unbacked pieces of paper never, ever,
worked in the past. We as a society have made the same mistakes all
over again, only this time it is not just a country or a region. It is
the entire world! It is the entire world, and the world is now a bigger
place than ever before.

The fiat/debt pyramid grew through the clouds until no one
could see how high. There is no telling how far and wide this pyramid
grew, the only thing for sure is that it was constructed upside down
and is resting on its point. That point is Fort Knox. That point is in
reality all the Gold stored in Ft. Knox, Denver, West Point, etc.. Even
if the Gold that is supposed to be there, is actually there, the
pyramids foundation is like the point of a needle. If the Gold is not
there as many suspect, the foundation might as well be air. We have not
had a Gold audit in over 50 years. The U.S. will have its poker hand
called shortly as to whether or not the Gold is there. I believe that
if the Gold IS there, you can add one zero to its Dollar price to
balance the books. If it is NOT there as I suspect, pick a number. Pick
a number of how many zeros will be necessary to add to Gold's Dollar
price to entice a holder of one ounce of Gold to make exchange for the
pieces of paper called Dollars.

We will witness the mother of all inflations and the mother of
all deflations at the same time. At this point in time I guess the
debate over whether markets are manipulated or not is now MOOT. The
government did it's best over the last couple months to rally the
Dollar and discredit Gold. The bluff that all was well and the Treasury
would not have to step in to rescue the GSE's has been called. "Real"
money will rise from the ashes of the banking system and will finally
seek its true value. The only question now is "how many zeros?'.

Bill Holter
P.S. and what becomes of the $1Quadrillion worth of derivatives outstanding.....?

I admit that reason is a small and feeble flame, a flickering torch by stumblers carried in the starless night, -- blown and flared by passion's storm, -- and yet, it is the only light. Extinguish that, and nought remains.- - Robert Green Ingersoll

Not social engineering!

"Who is John Galt?"