This problem begins with the fact that we underwrote mortgages sloppily, which means no one really knows what those assets are worth," said Lyle Gramley, a former Federal Reserve governor and now an analyst with Stanford Financial Group. "That makes bankers very leery, and has resulted in a significant contraction in the availability of credit."
The credit crunch means corporations can't borrow as easily, so they are delaying big projects, which cuts into the job market. And many of the same companies were already smarting from the downturn in housing, which has made many Americans uneasy about their household wealth and caused them to scrimp on spending.
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The last time the U.S. economy tilted into recession was 2001. And it was an entirely different animal.
Investors bore the brunt of that downturn as the stock market shook off the excesses of the late-'90s technology boom. Encouraged by their government — and fortified with tax rebates in their pockets — Americans kept spending.
Perhaps most importantly, there was no reason for anyone to doubt the stability of the financial system. There was no credit crisis to speak of, and the housing boom had yet to begin.
This time around, no one has declared a recession just yet: By the generally accepted rule, that takes two consecutive quarters of shrinking economic activity. The economy came close to stalling late last year but eked out small growth.
But the lack of an official declaration makes the pain no less real.
"I think the current financial crisis looks to me like the worst one since we got into the Depression," says Richard Sylla, who teaches the history of financial institutions at New York University's Stern School of Business.
Which is not to say this time will be anywhere near as bad — partly because, economists note, Federal Reserve Chairman Ben Bernanke is a student of the Depression and appears to be steering the Fed toward avoiding the mistakes of back then.
That may be why the Fed moved quickly to back up JPMorgan Chase & Co.'s lifeline loan to Bear Stearns when it neared collapse.
The Fed dusted off other Depression-era tools, too. It allowed securities dealers to borrow directly from the Fed, a privilege once restricted to commercial banks. And it announced it would lend up to $200 billion to investment banks in exchange for the banks' beaten-up mortgage-backed securities.
The idea is to maintain confidence in the American banking system. If that fails — if more Bear Stearns episodes emerge — it could gum up the entire economy, historians note.
"No one would trust anybody else, no one would be willing to do business," said Charles Jones, a finance professor at Columbia Business School. "And if that happens, the economy would feel that right away. So the Fed is doing what it can."
Another key difference: Today, the United States is just one piece of a complex global economy. A century ago, an American financial crisis was America's problem. Today, emerging economies provide an extra layer of insulation.
"People are still going to eat in China and India. They're going to be buying clothes and cars and airplanes," says Robert A. Howell, a distinguished visiting professor of business administration at Dartmouth. "So I think it's a whole different ballgame."
A better comparison might be the economic downturn that gripped the United States in the early 1970s, a time now widely remembered for long lines at the pump. Today gas is plentiful, but summer drivers face the scary prospect of paying $4 a gallon.
And as David Rosenberg, chief North American economist for Merrill Lynch, pointed out in an analysis this week, the parallels to the 1970s go much deeper than just the shock of record oil prices, which tripled during the 1973-1975 recession and have seen a similar rise in recent years.
Then as now, food prices rose along with energy. Then as now, declining home prices gave homeowners ulcers over equity. And the dollar, which held up fine in the 2001 recession, is falling now even more than it did in the early '70s — 9 percent then on a trade-weighted basis, 14 percent in the last year, according to the Federal Reserve.
One other interesting difference: In the downturns between the '70s and today, the baby boomers used their massive buying power to help spend the nation out of the slump. In the 1970s, they were too young. Today, they are focusing on retirement.
"The mid-1970s is the best template," Rosenberg wrote, "if there is any."
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If the 1970s truly are a guide, there's a lot farther to fall.
Back then, the Standard & Poor's 500 index fell 36 percent from its peak to its trough. Right now, the S&P 500 has only lost 15 percent from its record highs of October 2007.
Finding shelter from this downturn isn't as easy as you might think. So-called private label products — no-name cereal or crackers usually far cheaper than brand names — are less of a deal because of soaring commodity prices.
Nearly 90 percent of chief financial officers of global public companies don't see an economic recovery coming until 2009, according to a new survey by Duke University/CFO Magazine.
And that's more than just crystal-ball gazing: If companies see a sluggish recovery, they won't be taking any steps to build their payrolls soon and will remain cautious in how they allocate capital.
So what's the way out?
Former Fed chair Alan Greenspan wrote in the Financial Times last week that the financial crisis — which he said would likely be the "most wrenching" in the United States since World War II — would end only when housing prices stabilize.
Already, the Fed has slashed interest rates. It has cut the closely watched federal funds rate, the overnight lending rate for banks, six times since September, from 5.25 percent to 2.25 percent — two-thirds of the cut coming in the last two months alone.
But the Fed can't work alone. Upcoming tax rebates for millions of people and tax breaks for businesses may give a little relief, but economists think that something will have to be done soon to slow down the number of foreclosures, a cornerstone of the economy's woes.
"We can't have financial institutions not providing credit to the economy," said Eugene White, a professor of economics at Rutgers University. "We have to stop that if we want to avoid a deep recession."
Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart — determining how deep the wounds from the mortgage mess really are — also makes it impossible to map the path of the downturn.
"Financial crises happen, but they always do blow over," Sylla says. "It's a question of how long."
So in the meantime, Americans like Monica Nakamine are planning for a long road ahead.
The 37-year-old took a higher-paying job at a Los Angeles architectural firm, but has been putting the difference in her earnings right into savings. These days she's dyeing her own hair, picking through sales racks when she shops and washing her dog herself, rather than getting him groomed.
And she's considering some drastic actions in case things get worse — like moving to a cheaper city such as Austin, Texas, and getting rid of her gas-guzzling SUV for a hybrid sedan.
"Certainly I don't want it to get any worse," Nakamine said, "but I know it can."