Crashes have many fathers, all named in hindsight. Twenty years ago this month, the stock market lost nearly a quarter of its value on a day known as Black Monday, and we’re still trying to figure out precisely what set it off.

Today’s world has spooky similarities to that of October 1987. The dollar is weak. A leveraged-buyout frenzy has just ended. American politicians fret about a rising Asian competitor (Japan then, China now) while a scandal-plagued Republican president slinks out of his final term.

And most important, we are now, like then, in the midst of fallout from an explosion of hedging strategies that gave rise to overconfidence. In other words, we are where the markets were in the fall of 1987. Then, the crash was deep, but its aftermath was fleeting. This time we’re in for something worse: a slow-moving, grinding bear market.

Think of the current situation as a deep-sea earthquake. The plates shifted late last year when home prices in the U.S. stopped rising. At the epicenter were borrowers with poor credit who had rushed to buy homes as interest rates hit lows not seen in decades. They flocked in particular to mortgages with low teaser rates that reset every two years. The extent to which these folks were vulnerable merely to a flat housing market was underappreciated by the home buyers, lenders, regulators, central bankers, Wall Street banks that packaged the loans for resale, and credit-ratings agencies that slapped faulty Good Housekeeping Seals on the newly created securities.

That minor shock unleashed a wave, and the structures situated most prominently on the coast were wiped out first: Dozens of subprime mortgage lenders, including Ameriquest and New Century, collapsed, laying off thousands. Two Bear Stearns hedge funds invested mostly in subprime securities said goodbye as default rates went up. The damage spread to surprising corners of global finance, to money-market funds at BNP Paribas—a French banking giant—and to IKB, a German bank whose primary business is lending to midsize industrial firms.

From now into the next year, the water will continue to rise regardless of what happens to the markets on any given day. Mortgages taken out by subprime as well as other “better” borrowers are likely to continue to go bad as housing prices keep falling. As that happens, banks that invested in securities linked to the subprime market will get hit, prompting them to rein in lending in other areas.

Companies unrelated to the mortgage market will find credit tighter as banks divert cash to cover their bets. Trades and investment strategies that relied on the cheap-money boom will unwind. Private equity firms that overpaid for companies will be stuck managing their new toys rather than flipping them, since their lenders won’t be willing to refinance to trim their debt. Big banks will be forced to reckon with bad loans. The financial markets will most likely be more volatile.

That may be good news for distressed-debt investors, but for few others. The number of deals will decrease, deeply denting the big investment banks’ profitability. They, in turn, will have to more carefully assess the creditworthiness of their partners and be more circumspect when investing in newfangled securities. Consumers, seeing their neighbors underwater from home-loan debt, will pull back their already tightening spending even more.