If 30 years of financial crises teach anything - in Scandinavia, Japan, other parts of Asia and Latin America - the worst is not over for the U.S. economy. But that may be the good news.

This time, a tightly interdependent world has entered a synchronized contraction. Pretty much everyone is in trouble, leaving the world without an engine.

"We are in economic terra incognita," said Joseph Grundfest, a finance professor at Stanford University and co-director of the Rock Center on Corporate Governance.

If the averages of previous crises hold, Americans can expect unemployment to reach 11 or 12 percent, housing prices nationally to drop 36 percent, stocks to lose more than half their value, and real output per capita to plunge 9.3 percent, according to economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University, who have tracked financial crises back to 14th century England.

"Certainly the averages themselves are pretty discouraging," said Reinhart. "Because this crisis is as bad as they come."


A global calamity

What began as misdiagnosed tremors two years ago in U.S. subprime mortgages have spread in one way or another to every part of the globe: from Iceland and Ireland to the United Kingdom and Germany, from Japan to China and Singapore, Brazil to Mexico, the Middle East to Russia.

The latest is Eastern Europe, on the brink of a meltdown. Western European banks made euro and Swiss franc loans for homes and cars to people whose incomes are paid in Hungarian forints and Latvian lats. Many of those currencies have crashed, making the debts unaffordable.

New York University economist Nouriel Roubini, who warned of the crisis early on and is now widely followed, warned Thursday of a long, ugly Japanese-style "stag-deflation: a deadly combination of stagnation, recession and deflation." Roubini cited shocking fourth-quarter growth figures in key regions: 3.8 percent annualized decline in the United States, an 8 percent drop in Germany, a 13 percent drop in Japan, and a 20 percent decline in Korea. Taiwan's exports have fallen 40 percent, and its gross domestic product has plunged 8.3 percent, the worst since records began in 1952.

Banks are in denial


"In Europe, we've discovered banks have even bigger problems than banks here, and yet they're in denial still," said UC Berkeley economist Barry Eichengreen. "Not only do they have half of all subprime losses in Europe, but they've lent to extremely highly leveraged, risky Eastern European countries that are now falling apart. In Asia, they're having declines in industrial production on a scale that has never been seen in the history of the world."





For all the criticisms of Japan's long delays in cleaning up its insolvent banks after a spectacular real estate and stock market crash in the early 1990s - leading to a "lost decade" of economic stagnation - the United States has followed an eerily similar path. The government has fumbled for months in costly efforts to fix troubled U.S. banks, many of which are zombies in their own right. Analysts say the biggest may be insolvent, holding hundreds of billions of dollars in mortgage-related debt of dubious value.

Loan prospects dim

Hobbled by bad debts, the banks cut back lending, which slows the economy, and as the economy slows, bank assets deteriorate further and loan prospects worsen, creating a vicious cycle. There is wide agreement, based on Japan's experience, that the banks must be healed before the economy can recover.

Analysts outside the administration are increasingly concluding that the government will have to temporarily nationalize many U.S. banks. The latest to join the chorus is former Federal Reserve Chairman Alan Greenspan, the fallen icon of laissez-faire, who broached the idea last week.


The banks also need new capital, maybe $1 trillion to $2 trillion more. "The only issue is how fast it's going to occur," Kyle said. "The slower it occurs, the more likely we are to have a Japan scenario. The faster it occurs, the quicker we will get a recovery."

This is the fourth and biggest wave of financial crises of the last quarter century, said Robert Aliber, an international economist at the University of Chicago and contributor to a landmark history of financial panics by the late economist Charles Kindleberger. First came the Latin American debt crisis of the early 1980s, fed by foreign bank loans. Next was the bursting of property and stock bubbles in Scandinavia and Japan in the early 1990s, followed by the 1997 Asian financial crisis.

Oil, grain prices plunge

China and others "believed if they had low values on their currencies and large trade surpluses, they would get rich," Aliber said. "And of course they have gotten rich." But now demand for Japanese autos, Singaporean electronics and Chinese manufactured goods is plummeting. Likewise, commodity exporters - Russia, Venezuela, Canada, Brazil, Iran - have seen prices plunge for their oil and grains.

"These countries that a year ago had the world by the (tail) are finding out that life is very different when commodity prices are one third as high as they were," Aliber said. "It's emasculating Putin's foreign policy."

Others such as Iceland and some in Eastern Europe "lived off the carry trade, borrowing cheap foreign money, or at least the money they thought was cheaper than their own," Aliber said.

Aliber thinks the cycle may soon bottom out. Crashes, like bubbles, always end. Rather than a fifth wave, he expects the next excess to be over-regulation and too-cautious lending.

Others are must less optimistic. Policymakers "are still very much behind the curve," said UC Davis economist Alan Taylor, who says this crisis has no direct parallels in the past, given its size and interdependence of the global economy. "That's making it a little bit difficult to extrapolate from previous cases, except to say it's probably going to be a lot worse."

Stimulus and taxes: One thing in formulas is clear - federal tax breaks will be undercut by state tax hikes, Kathleen Pender writes. Business, D1