The crashing of America’s giant investment banks is beginning to sound like an Amazonian logging operation.

In quick succession Bear Stearns, Lehman Brothers and Merrill Lynch have all gone south to the lumberjacks. Of the Masters of the Universe, only Morgan Stanley and Goldman Sachs survive.

For how long?

With CDOs (Collateralized Debt Obligations) having poisoned the world’s financial system, like seeping toxic waste, a new danger is now forming on the horizon.

CDSs (Credit Default Swaps — insurance policies for bonded commercial IOUs), which are out there in their billions, are beginning to crumble in the face of massive defaults.

The world’s biggest insurer AIG is already in Lehman-style retreat — its shares plummeted by 70 percent in early trading yesterday — as is the monoline AMBAC. The CDS crisis is now with us. When optimistic Anatole Kaletsky of The Times (London) says we are getting into 1930s territory, you know we have a serious problem.

So what precisely are CDSs and how will their demise affect most of us in coming days, weeks, months and years?

George Soros estimates that the value of CDSs now equals half of U.S. household wealth, an almost unimaginable number, now put at $58 trillion.

CDSs are hedges made by investors in case a company defaults on its debts. In effect you bet on a company failing to protect your investment in the event it does just that.

The problem arises when large numbers of companies go bust and the CDSs themselves become worthless since no-one can pay them out.

A CDS seller undertakes to compensate a buyer if a corporate bond defaults. Since there is no limit to the size of cover taken out, the value of CDSs often exceeds a company’s debts.

Moreover, many CDSs are bought with borrowed money so the infection of the system drives deep into the financial heartland like veins in a blue cheese.

The danger now is debt deflation: a rapid reversal of debt issuance, or deleveraging as it is called.

Tim Congdon of the London School of Economics says, “Banking system capital is being wiped out. The risk is that this could lead to a contraction of credit and set off a self-reinforcing downward spiral, leading to the sort of debt-deflation we saw in the 1930s.

“It is already clear that money growth has ground to a halt over the past three months. We must prevent it from actually contracting. If the Fed and European Central Bank don’t cut interest rates soon, it is going to be a problem.”

The Bank of England’s rigid inflation target, set by Gordon Brown when inflation was low, is now a millstone around Governor Mervyn King’s neck at a time when energy, food and commodity price rises are being imported from global markets.

The Eurozone is similarly caught in a time warp relating to Germany’s neurotic fear of hyperinflation. Add the growing divergence between euro economies and a far deeper than necessary downturn is guaranteed for Western European countries.

America, which is free from those constraints, already has 2 percent interest rates. It is, however, suffering a double blow: the fading of the effect from the summer fiscal stimulus and a loss of export competitiveness as the dollar rises.

What began as bad government, worse regulation, grasping banks, financial structures that lacked resilience because they were built on sand, has turned into a perfect storm that is about to come ashore and swallow much of our familiar financial and economic landscapes.

As we wrote here a year ago, while the current triple crises are different from the 1930s, and may not bite so deep, the damage will take just as long to repair.

When a bubble of such exuberant overconfidence bursts, the fallaway has to be profound before a new wave can summon enough energy to restart the cycle.

What consolations can we find among this heap of misery? As usual Einstein has a thoughtful response:

“We act as though comfort and luxury were the chief requirements of life, when all that we need to make us happy is something to be enthusiastic about.”

Happy enthusiasm.