It is really bad. The NYT is reporting that if this goes unchecked it could get to the stage where people will not be able to get car loans. A professor who I am TAing for, and who teaches IPE (International Political Economy) said she was surprised that she'd be teaching students the political aspects of economics during the second great depression. Unsettling stuff, to say the least.
But it is worth considering the political aspect of what is going on right now. Currently, the Treasury Secretary - Henry Paulson - is pushing for a recovery package which may be worth up to 1,000,000,000,000 dollars. Take a long look at that number and, while your whistling, understand that he is requesting that there be almost no oversight on how this money is spent (the details of the bill are here). Barney Frank is making a decent stab at trying to push in some relief for homeowners who are being turfed out on their ear right now, but it seems sauce for the goose is not necessarily distributed equally. In a nutshell, the financial industry wants the government - that is taxpayers - to pull them out of the enormous slurry pit of greed they jumped into with their eyes open, but they don't think that taxpayers should (a) alter some of the conditions under which the banks foreclose or (b) interfere with the messed up incentive scheme (e.g. obscene bonuses etc.) that fails to punish this kind of sociopathy. It's fine for these financial gluttons to take our money to fix a problem they asked for, but not for anyone to benefit from that recovery except for themselves.
Insert comments about all animals being equal here.
Incidentally, for a good rundown on exactly how we got here, my friend Tim helpfully posted this
UPDATE: I may have spoken too soon