Even for those of us who have been bearish for the past 13 months, the past week has been breathtaking. When I told Trader’s Advantage members in February that my research suggested the S&P 500 would sink at least 38% in the bear market to the 960 level, I did not expect it to happen all in eight months.

I took a lot of grief for that view even as recently as August at  the Money Show in San Francisco. And now it turns out to have been too optimistic as the S&P 500 crashes toward 900.

The scale of the declines of late are unprecedented, so we can throw out everything we think about how oversold markets behave. This one is different because the level of leverage that is coming unwound has never been seen in the history of the world.

Keep in mind that the decline is not the work of bears, or short-sellers. We are seeing forced selling by people who owned stock as they struggle to put up collateral for margin calls. Forced selling is a virtually unstoppable force once it picks up speed. No one can tell when it will end because it creates a negative feedback loop that cannot be modeled. Selling of stocks  slashes companies’ market value; which leads credit rating agencies to downgrade their debt; which leads investors to sell their stock, and so on.

Meanwhile, insurance companies that hold shares and credit are falling over. Thursday night, Yamamoto Life in Japan was declared insolvent; it was one of the 35 largest insurers in the world. That will lead to a contagion of fear about other insurers, and more panic selling. That’s what a negative feedback loop is: It loops and loops in ways you cannot predict, until something changes the psychology.

Of course, the most leveraged companies are the most affected. I heard from a colleague back east tonight that Tontine Associates, a $10 billion hedge fund, was forced to liquidate into the close on Thursday. That’s not confirmed, but it sounds plausible. Tontine was still long a ton of energy infrastructure and regional bank stocks, so it makes sense—as many of those names were destroyed in the last hour of trade.

The head of that firm, Jeff Gendell, was considered one of the smartest of the smartest in the business, making 100% returns in the mid-2000s. In his letter to investors on October 1, he sounded chagrined and said he was taking down leverage and promised to fight his way back from what already amounted to 65% YTD losses. If the rumor is true, it sounds like he won’t be given a chance. So this all goes to show what I have been saying all along: Leverage kills.

Some numbers: The Dow has now fallen seven sessions in a row, losing 2,271 points. On the one-year anniversary of its high on Oct 9, 2007, it’s down 39%. The S&P 500 and Nasdaq are down 42%. Analysts at Lowrys have told us that the average bear market that lasts longer than a year has resulted in an average loss of 42%. That’s just an average, so since there have been many that were less than 42%, there will naturally be many that are more.

Thursday amounted to another 90% downside day, the third this week! None of them kicked off the sort of mild rebound rally we would normally expect. As a result, we are in unchartered waters in terms of being oversold. When the market is this weak and there is barely even two hours’ rally to show for it, you know that the urgency to sell has not been dimmed.

This kind of action underlines one of our mantras around here: Selling does not by itself make lows. You need buyers. So as long as there are no buyers, there is no bottom.

Roubini Has New Concerns

Unfortunately, the analyst who has done the best job forecasting the current debacle is even more bearish than ever. NYU economist Nouriel Roubini, whose views I have shared with you in the past, said in a note to clients tonight that the world is currently at severe risk of a global systemic financial meltdown and a severe global depression. Evidence includes global markets in free fall, money markets in shut-down mode and credit spreads at historic widths.

Not only is there a run on the primary banking system…

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…but also we’ve seen a collapse of the "shadow" banking system of broker-dealers, non-bank mortgage lenders, structured investment vehicles, hedge funds, and private equity firms—all of which borrow short and liquid, leverage those borrowings up and lend long and illiquid. As the stuff that they’ve borrowed falls in value, they are suffering a run on their liabilities; this has forced them to sell illiquid assets into the hole. With few buyers, many more will slip into insolvency, he says.

Making things worse, all advanced economies, representing 55% of global GDP, entered recession before this financial shock occurred, making the credit crunch more virulent. As a result, the crunch will push mild recessions into severe recessions, or worse, he says. Now even markets with large current account surpluses, such as Brazil, India, Russia and India, are at risk of a hard landing. The slowdown of trade and currency flows are forcing them to face a severe financial crisis.

The sources of these issues were the combination of a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble. All are now bursting at once amid the biggest real estate and bank bust since the Great Depression. This can only mean that delusions that the advanced economies will merely suffer a short and shallow V-shaped recession are out the window, as a more protracted L- or U-shaped recession that lasts at least two years in the United States and Europe becomes more likely, Roubini says. Consider that the latest recession in Japan lasted 10 years, and you know this can certainly happen.

Recession and Solutions

As these issues play out, we have an excess of goods in the United States and Europe while demand is falling, so deflation becomes more of a concern than inflation. It’s virtually impossible to fight deflation with monetary weapons, so this is a real problem. As a result, Roubini believes that the worst of the stock market crashes are still ahead of us, including the possibility of a 20%-plus crash such as the one seen in 1987. Panic is only now beginning to rise, as people will want their money out of paper assets at any price, and there appear to be no credible leaders to calm them down.

Every attempt to contain the panic has failed so far, and this is what disturbs me the most. We got a two-month reprieve out of the Bear Stearns rescue, then a one-month retrieve on the announcement of legislation to rescue of Fannie Mae and Freddie Mac; and then a one-day rally when the final deal was announced; and then the markets didn’t rally at all on the bailout of AIG or the $700 billion bank bailout. Then on Thursday  we had an unprecedented, coordinated action worldwide to cut interest rates, as well as a new program to back commercial paper, and it resulted in a 7% decline in the Dow—the old Bronx cheer.

When no sensible rescues work, and no oversold conditions result in any rally, something is singularly wrong. It’s a vicious cycle and there is no way that any analyst can call a bottom until some very dramatic new policies are attempted.

Roubini has a few ideas along those lines. They include another rapid, huge round of interest rate cuts globally; a blanket guarantee of all bank deposits; reduction of the debt burden of insolvent households and a temporary freeze on all foreclosures; massive unlimited provision of liquidity to all solvent financial institutions and businesses of all types and sizes; massive direct government stimulus including new public works, infrastructure spending, tax rebates to the middle class; and grants to local governments; total recapitalization of all banks.

The government may be on the path to this with word in the Wall Street Journal tonight that the U.S. might temporarily back all U.S. bank deposits and loans. This would be a great start.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.