During post-WWI lead-up to the Great Depression, buying on credit really caught on, artificially pushing the GDP up, as happened again in the 90s.  For example, going into the Depression, 60% of cars and 80% of radios were bought on credit (Robert S. McElvaine, The Great Depression: America 1929-1941).  Although radios are a bit cheaper today, I would guess that a similar number of cars are financed and at a similar percentage of annual personal income.  There are several differences that prevented a similar outcome back in 2000-2001, but one particularly noteworthy was the Federal Reserve pumping cash into the economy by lowering interest rates.  Additionally, the tremendous surge in deficit spending during a wartime economy (that is when the government decides to spend like a bunch of drunken monkeys), kept it afloat a bit longer.  But now, how much lower can the Fed lower interest rates?

Do I think we are headed for a depression?  No.  But the foundations are shaking.  Consider that all the current rumblings are resulting from 9% of all mortgages being behind or in some stage of foreclosure.  That's an awful lot of defaults, but should that result in bonds being valued at 20 cents on the dollar?  Even with the real estate bubble apparent in different areas, the collateral backing those mortgages has not lost 80% of their value.  This is the logic behind the "Common Sense Plan" mentioned below.  By refinancing and insuring the mortgages, the risk is no longer lumped into the grossly devalued bonds, but in the individual mortgages.  The homeowners get a fighting chance at keeping their homes.  The risk of default is lowered by the refinancing, and transferred from the banks by the government insurance.  Rather than buying the entire "troubled asset" at enormous cost, the government insures the difference between the outstanding mortgage and the money reclaimed at the foreclosure sale.