But what if the foundations of much of its recent glory have been built on a mountain of debt, a mountain that has disappeared almost overnight? What if the prosperity on US’ Main Street is as dependent on smoke and mirrors as Wall Street?

Few people in the US believe that, which is why US treasury secretary Henry Paulson’s bailout package was voted out in the US House of Representatives.

The majority of people in the US seem to believe they have no skin in this game, that the bailout plan is a vast conspiracy hatched by Wall Street plutocrats, who have got them in this mess in the first place, and that it has no bearing on their lives.

No wonder that, with an election coming up soon, politicians are busy striking poses. They want to be seen as champions of the little guy against the robber barons.

True, Wall Street is in a mess, a mess of its own making. True, much of the prosperity on Wall Street has eluded the average American.

But the problem is that Main Street America’s current standard of living is built on a foundation of credit. And the credit system has completely seized up.

Banks are not lending to each other, the commercial paper market, from which most businesses get their funding, has dried up and if the system is not fixed soon, credit will also stop flowing to Main Street businesses.

That will mean the closure of firms, layoffs, lower spending and a deep recession. The tide of liquidity on which the global economy surfed to a 5% rate of global gross domestic product (GDP) growth in 2006 is now ebbing.

There’s a classic Warren Buffett quote that says when the tide goes out you learn who’s been swimming naked. It now turns out that includes most banks, insurance companies, real estate companies, house owners, and emerging markets. In short, it includes most of us and it’s not a pretty sight.

Also Read Manas Chakravarty’s earlier columns

Worse, this is not just an ordinary downturn we’re talking about. George Magnus, senior economic adviser with UBS AG, wrote about the difference between the current crisis and the more common or garden variety of downturns in a research note last April. “The conventional economic downturn is self-correcting," he wrote. “The deleveraging phenomenon tends to be self-reinforcing." What’s more, the longer the credit markets continue to dysfunctional, the bigger the chances of more banks and financial institutions going belly up, worsening the problem.

As for the impact on the economy, a note from Merrill Lynch and Co. after the defeat of the Paulson plan pointed out, “As it stands now, the tightening of credit conditions could put severe strains on the economy and cause default rates to rise. Our estimates already suggest that delinquency rates on a wide swathe of consumer and corporate loans could almost double, to levels not seen since the early 1990s, and threaten to load even more non-performing loans onto bank’s already burdened balance sheets. Without some way to lower the amount on non-performing assets on bank balance sheets, the outlook for credit creation, and the economy, is quite dim."

To be sure, the Paulson package was no panacea. We had already seen market scepticism about the bailout in Asian markets on Monday and the Dow Jones Industrial Average was down quite sharply in early trade on Monday, when the markets expected the package to be passed. Cracks have started appearing in European banks, suggesting that the credit crisis is spreading.

Critics of the plan have pointed out that it didn’t go far enough, was too stingy and didn’t address the roots of the problem. For instance, one of the niggling questions about which nobody seemed to have an answer was what would be the prices paid by the US treasury for taking the toxic debt off the books of the banks. If the banks had to mark them down substantially, that would mean they would need more capital and where would that come from?

Moreover, as long as house prices continue to fall in the US, the bad debts of banks would keep rising. The inter-bank markets would not function effectively, as banks would continue to have the problem of wondering which banks had more bad debts on their books.

And finally, there were worries about whether the scale of the problem would be bigger than what even the US government could manage.

So, passing the Paulson plan may not have been enough to stop the haemorrhaging. But it could have cushioned the fall in the asset markets. At the moment, too, the markets haven’t quite given up hope and they expect the US bailout to happen soon, in some form or the other.

Whatever be the solution, the upshot will be that the US economy will have to get by on less credit and lower consumption. There’s no way out from a pronounced slowdown in global growth. Asset markets around the world will have to adjust to this new, sobering reality.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com