Many of us will have heard the well-known line from a song that goes, "A pub with no beer!" It was all great fun. But, "A bank with no cash" is a cry that should send shivers down the backs of us all.

In Fortune magazine, Bill Gross of Pimco recently said, "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August."

On Nov. 28, the Financial Times reported that Citigroup had gone — "cap in hand" — to the Abu Dhabi Investment Authority, seeking an immediate cash injection of some $ 7.5 billion in the form of convertible shares. Does that sound desperate? It certainly does to me.

Just how desperate Citigroup must have been is illustrated by three important facts.

First, when a so-called prime bank, unable to find funds at home, has to go to a foreign market for cash, people should be wary.

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Second, that a prime bank would have to pay 11 percent — a junk-bond rate — on a convertible share shows just how low Citigroup's credibility has sunk.

Finally, the fact that the convertible shares are mandated to convert at set prices in the future shows how desperate Citigroup was, or sees that it will be, for equity funds.

Now, online brokerage E*Trade has obtained even more expensive financing.

Despite all of these clear warning signs, stock markets climbed enthusiastically on Nov. 28, led by the financials of all sectors!

Talk about a false dawn. It appears that the greed of the bargain hunters appears to know no bounds as they search for the elusive "bottom" of the market — a market more likely to collapse than to roar.

It must be said, that the growing awareness of the recession we have long forecast has added fuel to speculation of a further Fed rate.

Of course, lower interest rates mean future corporate earnings can be discounted at lower rates and therefore show a higher present value, thereby justifying higher stock prices.

But the big question remains: Will corporate earnings hold up?

As I have said repeatedly over past months, I believe we are headed into a recession and have urged lower rates as a remedy.

Arguing that the forces of recession and inflation were about evenly balanced, our Fed initially resisted calls for lower rates. Then, in August, the outrageously leveraged housing bust, that we had long warned of, burst upon the world.

Our Fed soon realized that the subprime mortgage crisis was serious. Worse still, its members realized that the "slicing and dicing" of risk (to which some, including us, hinted amounts to fraudulent concealment) had resulted in a further crisis — a crisis of confidence in the credit markets — not only in the U.S, but worldwide.

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Our Fed suddenly realized that there was a risk of a meltdown in credit markets and injected massive amounts of short-term liquidity into the banking system.

At that time, they still talked of a robust economy, even though the statistics already showed GDP to have been trending downwards.

Our Fed soon began to realize that, despite their actions, banks were not lending. In short, the Fed had been spinning its wheels. So, to encourage lenders, the Fed lowered rates in September and again in October.

But still, lenders are reluctant to lend. Why? We believe for two main reasons, both vital to the survival of our present banking system.

First, there remains a distinct fear in the credit markets that some financial institutions were actually unaware of their exact exposure to the subprime debacle and that, in coming months, yet more disclosures might be made.

We have long maintained that the subprime problem will spread to other areas, from mortgages to the credit markets in general.

A further problem is that, as we reported earlier this week, Ohio Federal Court Judge Christopher Boyko gave a ruling that should send shivers down the necks of all bankers worldwide and many municipal and corporate treasurers who, tempted by greed or promotion, invested in U.S. subprime derivatives.

Judge Boyko threw out a group of applications for foreclosure, saying the ultimate ownership of the underlying real estate is far from clear!

In other words the fraudulent, or deceitful in the very least, slicing and dicing of the underlying risk within composite mortgage derivatives, such as collateralized debt obligations (CDOs) — many of which were rated triple-A — extended beyond the confusion over the level of risk to confusion over the ultimate ownership of the collateral. How's that for modern banking?!

We now must face the fact that CDOs may have not just greatly reduced market value but, devoid of ultimate foreclosure rights, have no value whatsoever!

How would a zero value affect our financial industry, and our especially banking system?

I believe that our Fed is composed of smart people, but they are more academics than market practitioners.

In short, they are still in the financial equivalent of the steam age, when the international banking world, they oversee, has been operating in the space age, a world where reckless leverage and "pyramiding" have become a Wall Street art form, one rewarded by massive bonuses.

I believe our Fed is way behind not one, but two major curves that will affect us all, dramatically.

As late as October, Ben Bernanke was assuring us that our economy would still show slower yet positive growth. He and his committee are now facing recession, but have lowered their rates by only 75 basis points.

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Even so, it takes between nine and 24 months for Fed rate cuts, such as they are, to gain economic traction.

The result is that as we now enter a recession we face an unnecessarily deep recession — or something worse still.

I now believe that we can avoid the worst, but only if our Fed offers immediate and massive rate reductions of between 2 and 3 percent!

Secondly, if Judge Boyko's decision is upheld, it tells me that the subprime debacle will not merely spread rapidly throughout our financial system but will explode upon it!

To date, we have heard only the detonator of the subprime bomb. When we hear the explosion of the main charge, the dreadful echo could well be the slamming shut of the massive doors of our banks — then what?

Gold would take off, as long predicted.

Make sure you have a few weeks of cash in your house. The ATMs will close with the banks' doors.

The banking system that emerges will, I believe, be far more "old school" in its attitudes.

But the big political question, as the campaign season kicks into gear, will be how much of the final, astronomic bill will be left to us, the U.S. taxpayers?

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