2008 MacBook Pro Blinking Folder icon
The blinking folder icon indicates that the computer can't find a valid startup disk. Based on the tests you've performed, it may that one or more critical files was removed from the drive, but the screwed up permissions are indicative that something is screwy.  I would reinstall the operating system.

If there are files on the disk you want to save, copy them off of the drive onto an alternative volume before installing the OS.