The U.S. economy over the past 230 years has experienced 3 to 6 depressions depending on which historian you consult.  The big three 1837, 1893, and the mother of them all 1929.  The disputed ones: 1857, 1873, and 1907.  Each was triggered by a financial panic.  The panic of 1907 began the 6 year effort to enact a central bank in the form of the Federal Reserve System (aka: the Fed).  From 1832 to 1913 the United States had no central bank.  Interestingly 5 of the 6 economic depressions occurred during that time.  The Fed failed to act timely to stem the 1929 panic and it spread.  The New Deal brought more power to the central bank and other stabilizing laws to prevent future busts in the economic system.  it has worked pretty well. Since 1929 the United States has not experienced a depression.  We have had contractions that are labeled "recessions"; neither have we had a financial panic like we had last week since 1929. (I may well be wrong but I couldn't find an example)

Each also followed a period of wild speculation and too little regulation of our lesser angels.  The roaring twenties left the worst hang-over of all.  I think an honest assessment of the past 10 or 12 years qualifies as a period of wild speculation and too little regulation of our lesser angels between the dot.com bubble and the real estate speculation.  How the Fed handles it will determine if we feel a bit queasy or whether we have a full blown hang-over.  Until last week I was pretty much feeling "so far, so good." 

Last week's panic cause the Eurpoean Union central bank to pump billions of Euro's into the financial system and the fed as of today has pumped 94 billion dollars into the US economy.  Today the Fed abruptly cut the discount rate to banks which will help financially strapped financial institutions. Will September see a reduction in the federal funds rate that directly impacts our everyday credit costs?

Our economic system relies a great deal in our faith in the system and the predictability and stability of that system.  Small changes in employment rates, interest rates, foreclosure rates, inflation rates all have a disproportionate impact psychologically compared to the actual impact on the average person's actual finances.

So the market is spooked. Over 100 lenders have gone bye-bye in the past 8 to 10 months.  Consumer confidence is down.  Economic fundamentals may be good but even during the Great Depression 2/3rds of the country was still working. I believe the economy only contracted by 25%.  But the misery is legendary and left lifetime scars for many. 

Prior to a career change to real estate, I was in social work for 20 years, some of those elderly folks I worked with were prime examples of folks with those lifetime scars, having come of age just as so much was tanking.  We are too removed from events 80 years ago and there are too few living oracles left to remind us of the results of miscalculation.

Hopefully the the Federal Reserve Board chairs are calculating accurately and are not so obsessed with inflation that they miss the bigger picture.