You know things are bad on financial markets when an investment research note starts talking about Dante’s visit to the nine circles of Hell with tormented lustful souls and gluttons living in filthy slush.

In the case of State Street Global Markets’ latest report, however, there is a more direct link than simple hyperbole about the way investors are feeling. The firm recently had a chat with former U.S. Treasury Secretary Larry Summers who defined what he saw as the five vicious circles of the current financial crisis.

It goes like this:

Circle One: House prices fall in value, putting some people into negative equity and leading some to default on mortgages. Foreclosures further erode asset values.

Circle Two: Falling asset prices erode bank capital, making banks more hesitant to lend, leading to further asset price falls and lower capital levels.

Circle Three: A slowing real economy reduces financial asset prices, leading to less lending and less investment. This causes the economy to slow further.

Circle Four: A slowing economy means less demand for goods and services, leading to lower employment and even less demand.

Circle Five:  Confidence in the financial system breaks down. State Street says that investment flows and moves on global stock markets clearly suggest this is where the financial world is at the moment.

It is worth remembering, perhaps, as investors stare into the inferno, that Dante did come back from his visit to Hell’s circles. But then again, he did not go straight to Heaven. There were seven terraces of Purgatory to manoeuvre through first.

Britain’s banks may have borrowed over 200 billion pounds from the Bank of England, four times the amount they were expected to take under an emergency liquidity scheme. It leaves them facing a sharp funding strain next month when the rug gets pulled away.

Alastair Ryan, analyst at UBS, reckons banks have taken over 200 billion pounds under the BoE’s Special Liquidity Scheme since it was offered in April. They had been expected to borrow about 50 billion pounds, although estimates were lifted to near 100 billion as wholesale markets stayed closed. The scheme allows banks to exchange hard-to-trade mortgage assets for government bills.

The problem is the BoE isn’t planning to extend the funding beyond a Oct. 20 deadline . If the borrowing from UK banks has been as high as Ryan estimates, it will have eased a short-term problem but shows how much the liquidity is needed. It also leaves even more medium and long-term funding that the banks will need to replace at some point.

European and U.S. central banks aren’t closing their funding windows. By shutting its window the BoE is pinning its hopes on securitisation markets re-opening, but that seems unlikely soon and could force banks to further shrink their mortgage books at a tough time for them and the housing market.

As the deadline looms, UK regulators, criticised for their handling of Northern Rock at the start of the credit crunch, will face mounting pressure to extend the scheme as confidence among UK banks clearly isn’t back yet.

New figures show the once-soaring housing market in California continuing an earthbound descent. According to an index that tracks home sales in major metropolitan areas, the price of a single-family home in June fell an average of 15.9% from last year. But the same index, the Standard & Poor’s Case-Shiller Composite-20, released Tuesday, also reported a 25.3% price drop in Los Angeles, a 24.2% decline in San Diego and a 23.7% drop in the San Francisco Bay Area. Only Las Vegas, Miami and Phoenix fared worse, with home prices falling 28.6%, 28.3% and 27.9%, respectively.

The S&P figures come on the heels of equally gloomy numbers from the real estate industry. On Monday the National Association of Realtors said the number of existing homes across the U.S. sold in July rose 3.1% on a seasonally-adjusted basis, while the national median price of an existing home fell around 7% to $212,400. For the same month the California Association of Realtors reported a 43% uptick in the number of existing homes sold statewide but a 40% median price slump, to $350,760, for existing homes.

Lower prices could help those Californians who’ve been priced out of the once-booming housing market, but the state is also among those hardest hit by the real estate bust, and sales volumes in many areas is being pushed by “deeply discounted, distressed sales,” according to CAR President William Brown.

Earlier this month foreclosure tracking company RealtyTrac said more homes across the U.S. are ending up in the hands of mortgage lenders. The company tracks preforeclosure actions including notices of default sent to borrowers, public auctions of homes and bank repossessions. Last month some 28% of foreclosure activity nationwide involved banks repossessing properties under default, while almost a third of foreclosure activity in the Golden State involved so-called real estate-owned properties. Nationwide, foreclosure activity rose 55% on a year-over-year basis, but was up 85% in California.

Analysts don’t see the housing correction easing any time soon. In a research note Tuesday Merrill Lynch said home prices remain well above those reached before the bubbly heights of the housing boom and sees prices nationally falling a further 15% to 20% by the end of next year.

BMO Capital Markets echoed that view.

“Increasingly, our national housing crisis is slowly becoming a series of regional crises with most of the pain felt in Florida, Arizona, Nevada and California. That said, regional price declines will be with us for a while and given that California represents roughly one-third of our GDP, housing will be a drag on economic growth for at least the next four quarters,” the broker wrote to clients Tuesday.