Sage,
Most of our financial system is based on smoke and mirrors. I used to think that banks were able to make loans with money that was backed by some sort of tangible assets that the bank owned. Not so. In fact, over 90% of our money is created out of thin air by banks when we apply for loans. If you google "Money as Debt", you can watch a video presentation by Paul Grignon that explains how this came about. He's a Socialist, so I don't buy his proposed "fix", but his description of our current financial setup is pretty accurate. It's all dependent on the vast majority of borrowers paying off their loans, which explains why the recent mortgage meltdown is such a big deal to our entire economy.

If you look at how the stock market works, it is more of the same. Stock prices are supposed to be based on a company's profitability, so that if a company does well, the stockholders benefit. There IS an indirect connection, but in reality, stock prices go up or down based on investors' collective expectation of future stock prices, not how well the company is actually doing, at least not directly. So if investors lose confidence in a particular stock, the stock price plummets, even if the company is actually making a good profit.

I don't know the fix, but personally, I am going to be very debt-averse, at least until things stabilize in a year or so.