Oddly, in retrospect, the crash of 1987 seems almost like a nonevent. There was no immediate economic recession, and the market finished higher for the year. Can we skate through again today?

John McCain has been reciting a quote attributed to Chairman Mao: “It’s always darkest before it’s completely black.” That may be where we sit now. In August, we had a credit panic akin to a run on the bank, but on a global scale. Even companies that had made mostly safe loans—like Countrywide, the nation’s largest mortgage lender—found that the short-term-borrowing markets were closed to them. But judicious financial management from politicians, regulators, and, most important, central bankers can calm credit panics. Indeed, Ben Bernanke’s largely symbolic mid-August move to lower the rate at which banks can borrow from the Fed quieted the markets’ demons for a bit.

The skittishness, however, was a symptom of larger imbalances—in the dollar, in global trade, and in American consumer debt. What we are going to discover in the coming months is that the underlying problems aren’t easy to solve, even with Fed rate cuts. Central bankers may find themselves impotent, because if lenders and borrowers have had their fill, even cheaper rates won’t do the trick.

The housing boom didn’t merely inflate home prices. Home equity extraction has accounted for as much as one-third of consumer spending growth at points during the boom, according to Ethan Harris, an economist at Lehman Brothers. Revenue at Home Depot and Lowe’s raged as people took money out of their homes in the form of equity loans to D.I.Y. Boat manufacturers, flat-screen-TV makers, lumber producers, and the railroads that shipped the goods all thrived—and hired. Of the 6 million jobs created since August 2003, when the job market started growing again, about 15 percent are attributable to housing and industries that benefitted from the boom, such as furniture makers and home-improvement retailers. In a more normal time, the housing industry accounts for about 5 percent of the nation’s jobs.

For now, borrowers with adjustable-rate mortgages will find it harder to refinance as their loans’ higher rates kick in. This month, a record $50 billion in mortgages will reset, according to Moody’s Economy.com. Retail banks won’t want to extend any more credit, even to customers who can afford the loans. Commercial banks are going to be nursing the hangover from easy corporate and commercial-real-estate lending for years. At the very least, they will have to increase their currently low ­reserves to cover loans that might go bad, thus hurting margins.

And even the private equity firms that aren’t losing out yet—the ones that can still persuade big banks to fund their deals—will have problems in the coming years. Buyout firms are going to have to manage companies, not just tinker with their financial engineering and flip them. Given the wary credit environment, the first buyout trouble spots are likely to be financial companies, like the already stumbling GMAC, the Cerberus-controlled lending arm of General Motors. But even the manufacturing and retailing L.B.O.’s are going to face—to put it in management-speak—challenges.

Is there a bright spot? The best Arnott can muster is that we could enter “a fairly significant bear market, but I don’t see a likelihood of a crash.”

While the stock market isn’t nearly as expensive as it was in 1987 or even in 2000, it’s not cheap. Yale economics professor Robert Shiller, who famously called both the Nasdaq bubble of 2000 and today’s housing debacle, pegs the price-to-earnings ratio of the companies in the S&P 500 at 27, computed using earnings over the last 10 years—a valuation that’s almost twice the historical average. What’s more, with corporate profits so high, there’s a lot of room for them to fall.

Apologists have failed to understand that it’s not much of an accomplishment that markets are more complex than they were 20 years ago. “Of course, risk is spread in a more sophisticated and diffuse way today,” says Grantham. “But it’s been accepted in a much sloppier way than any time in history. If it’s a bad enough loan in the first place and there’s enough of it, then spreading it around simply means contaminating a very broad spectrum of the financial world.”