Seems that the US collapse is going worldwide, as of this writing. The story here isn't very complicated. Mortgage woes (not subprime, it's spreading beyond subprime, which is the problem) are causing problems in a number of hedge funds. The huge securities binge of the last few years was made possible in large part by bundling mortgages of various types into instruments which could be sold to investors. When done properly, the theory was that if even a few defaulted, eh, the instrument as a whole should be fine. But it wasn't always done properly, and even when done so it still wasn't done properly, because the risk was much higher than standard models predicted because mortgage lenders were lending to all sorts of people who shouldn't be loaned to and because the housing market was a bubble but since people in the middle of a bubble can never admit that (if many people did, it wouldn't be a bubble) they didn't account for the fact.
Add that to extremely loose money policies by a number of major central banks (Japan, most notably right now, but the US in the past) and the necessity for the Asian countries to buy dollar denominated assets so they could prop up the dollar, and thus their export industries, and you had a classic recipe for a financial bubble.
We then had mortgage lenders start going under. Some hedge funds were forced to admit that they were taking staggering losses (including, but not limited to some Bear Sterns funds) and either add liquidity or stop redemptions, and the entire system started to realize just how widespread bad loans, and therefore bad securities, were. Since these funds tend to be heavily levered (10:1 and up), each time one can't make its margin calls means various other funds, banks and lenders suddenly have bad loans on their hands. They then must consider selling in order to cover them.
In addition, a lot of securities were listed on the balance sheets at "book price" (aka Mark to model). Now that various funds are being forced to sell them in a rush, they're getting "market prices" and the market prices are much lower than the book prices. Other funds, otherwise unaffected, have to take this account in how much they're valuing the securities on their books (market prices generally trump book prices), which causes them to suddenly have balance problems. And so it spreads - or can.
Meanwhile the Yen is rising, and there is speculation that the Bank of Japan wants to raise the overnight rate from its (practically free) rate of 0.5%. If the rise continues, or the rate does increase, a lot of people who have been borrowing from Japan to invest in US assets are going to be caught in a vice and forced to sell off. (Which means, odds are, that the BoJ will back down for now while making it clear people should start an orderly unwinding of such positions).
How bad's all this going to be? Bad. That said, the European Central Bank has stepped in with a huge injection of liquidity (which so far isn't stopping the panic), as has Australia, and the Bank of Japan. [1] But the market was hoping for, and didn't get, an easing of the Fed rate -and overnight funds, while they may help the banks sop up the mess a bit, won't necessarily deal with the underlying problem, which is that a bunch of people are waking up and realizing the securities they were sold are going to pay back cents on the dollar.
The pain, in other words, is real, and it's probably going to require an S&L style bailout in the end. And since it is real, even if the market manages to recover due to enough liquidity from the central banks, the underlying problem will continue to unravel. And if the banks insist on sending huge amounts of liquidity into the market over a longer period, well, we'll probably have yet another bubble.