The Journal has a fantastic story on page one about the devastating impact of the crisis on Iceland. After privatizing its banks a few years ago, they went wild, driving super-charged growth by getting off-shore deposits and leveraging up with huge amounts of debt. Now?

Today, Iceland’s swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. The largest bank of all, Kaupthing Bank, was seized Thursday, and trading was suspended on the stock exchange until Monday. The krona has ceased functioning as a currency outside Iceland.

Inflation and debt payments are soaring, and trade has been crippled in a country heavily dependent on imports. The U.K. and Netherlands are suing over frozen deposits held by their citizens, while the government is trying to arrange more foreign loans to help stave off national bankruptcy.

The paper says the collapse has the country’s bankers looking back to its historic industry for a livelihood: fishing. One Icelander who stayed in fishing the whole time drop some wisdom:

A real economy needs products to sell, Mr. Leifson says. Banking is “paper money. You can’t do anything with paper money.”

The WSJ surveys economists to find the obvious: the economic “crisis will deepen”!

“We’re in the middle of a very dark tunnel,” said Brian Fabbri of BNP Paribas, referring to the worsening credit crunch. “Each day we see another crack in the system.”

Those cracks are quickly adding up. On average, the 52 economists surveyed now expect U.S. gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009.

Check out the accompanying graphic to see how the dismal scientists’ forecasts have fallen off the cliff from month to month.

And if you weren’t concerned about the Wise Men in Washington and their ability to guide us through this mess, Floyd Norris in the NYT says the Fed as recently as three weeks ago was optimistic about the economy.

We should be so lucky as to get sluggish growth for the remainder of 2008. The gross domestic product seems likely to show significant declines, and those declines may continue into 2009.

These guys need to get out of their offices more.

Norris also says the government should “flood” capital directly into the banks to get them lending again—something Treasury Secretary Paulson mentioned he may do this week.

And a lot of cash. A rule of thumb might be that if the government thinks a bank needs $4 billion in additional capital, it gets $8 billion.

The terms could be arranged so that the government gets a reasonable profit if the bank can pay the money back within five years, and can convert its stake into common stock only if that deadline is not met.

And Norris is also right on here:

“The central bankers all learned the lesson of the 1930s,” said Robert Barbera, the chief economist of ITG, a Wall Street firm. That lesson was that if the choice is between allowing the system to collapse and writing a lot of checks, you write the checks and forget about ideology.

Unfortunately, none of them learned the lesson of the 1920s, which is that when asset prices soar, it is not a good idea to sit around doing nothing, as the Fed did for most of the housing boom. Cheerleading, which it sometimes did, is even worse.

The Times says the troubles in the financial sector are now spreading to the insurance industry (AIG, it says, was considered a unique case because of its unusual exposure to credit-default swaps).

But now a wave of losses is moving throughout the insurance industry, caused by the seize-up of the credit markets and declining investment values.

“Insurance companies tend to focus on high-quality investments,” said Douglas L. Meyer, an insurance analyst at Fitch Ratings. When the declines were mainly in the lower-quality investments, he said, the industry was relatively sheltered from harm.

Now, though, Mr. Meyer said, “the depths of the current credit crunch is starting to affect the high-grade securities, so that’s starting to affect the insurance companies more.”

Irwin M. Stelzer in the Weekly Standard says free trade, or at least freer trade, is over.

The era of ever-free trade has ended. Any lingering hopes that free-trade advocates might have had to stem the rising tide of protectionism are gone: A worldwide financial crisis is not an environment that fosters acceptance of the view that all is for the best in a world in which capital, labor, and goods move freely across borders…

But it would be unfair to blame the backlash against free trade solely on the fears unleashed by the current economic problems or a hunt for political advantage. Defenders of free trade can make a reasonably good case that it increases overall efficiency and aggregate material welfare. What they have failed to do is develop a defense of the way the benefits of free trade have been distributed.

Sebastian Mallaby of the Post calls for a stimulus package for the rest of the country.

The fastest and fairest way to help ordinary people is via a budget stimulus package. Part of the extra spending should be distributed to state governments, which are having trouble maintaining Medicaid and other programs as recession eats into their tax revenue. Part of the extra spending could go to infrastructure projects, though this tends to be a slow way of getting cash into the economy. But much of the stimulus should be in checks made out directly to citizens.

Bloomberg writes on economist/seer Nouriel Roubini’s proposed plan of attack. And, look out below:

“At this stage the risk of an imminent stock-market crash — like the one-day collapse of 20 percent plus in U.S. stock prices in 1987 cannot be ruled out,” said Roubini. “The financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and investors have totally lost faith in the ability of policy authorities to control the meltdown.”

Lastly, Slate’s new Big Money site takes the juiciest parts of the Lehman Brothers and AIG probes in Congress and puts them in bite-size form.

But I think we could all use some good news these days, so I’ll end on what hasn’t been widely acknowledged, that AIG’s brief CEO Robert Willumstad refused his $22 million severance.

Dear Ed:

As you know, the Board of Directors of the company decided that my termination was “not for cause.” Accordingly, I am entitled to receive severance payments under the AIG Executive Severance Plan of approximately $22 million. While I appreciate the Board’s intention to fulfill this obligation, I have decided, after careful deliberation, to forgo the severance payments.

If you'd like to get email from CJR writers and editors, add your email address to our newsletter roll and we'll be in touch.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.