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."

Pessimists observe that Japan's Nikkei stock index peaked around 39,000 in 1989 and two decades later is languishing around 7,500. Japan's real estate market still has not recovered after 17 years. The Dow Jones index did not rebound from the 1929 U.S. stock market crash until 1954.

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

"The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production, employment, exports and imports is accelerating rather than decelerating," Roubini wrote.

"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."

Any psychologist examining capitalism would quickly diagnose a manic depressive. Today's upheavals, coming after a generation of relative calm in the United States, may seem shocking to Americans who have primly observed bank runs in Argentina or scoffed at Japan's inexplicable reluctance to bury its zombie banks.

But financial crises have been common since the South Sea Bubble of 1720 and have grown more frequent in the last three decades, affecting larger and larger countries.

The problems always begin with asset bubbles that make every investor look smart. Neighbors envy neighbors getting rich and jump on board, often taking on debt to do so. Bubbles always burst, ending in tears and handcuffs and leaving everyone poorer.

It is human nature to "forget what happened before, to think that we've reinvented penicillin," said Reinhart, whose forthcoming book with Rogoff is called "This Time Is Different: Eight Centuries of Financial Folly." People think, "Oh yes, these things have happened, but they happened to somebody else, somewhere else, at another point in time. They don't happen to us. If you look at the mentality in the run-up to the current crisis, that's exactly what was going on with the real estate market."

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.

"If you look at Japan, if you look at Sweden, if you look at the S&L crisis in the U.S., it's clear what's going to happen," said Pete Kyle, who holds a chair in finance at the University of Maryland. "What's going to happen is the bad assets are going to be removed from the banks, the government is going to wind up owning the assets and winding them down. The government will take its losses and, over time, maybe 10 or 15 years, we'll figure out how much money we've lost."

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