For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.

There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:

First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.

For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.

Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.

With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.

Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.

Fiscal policy in the U.S. and China also has its limits. Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)

Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.

Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).

With massive excess capacity in the industrial/manufacturing sector and thousands of firms shutting down, why would private and state-owned firms invest more, even if interest rates are lower and credit is cheaper? Forcing state-owned banks and firms to, respectively, lend and spend/invest more will only increase the size of nonperforming loans and the amount of excess capacity. And with most economic activity and fiscal stimulus being capital- rather than labor-intensive, the drag on job creation will continue.

So without a recovery in the U.S. and global economy, there cannot be a sustainable recovery of Chinese growth. And with the U.S, recovery requiring lower consumption, higher private savings and lower trade deficits, a U.S. recovery requires China's and other surplus countries' (Japan, Germany, etc.) growth to depend more on domestic demand and less on net exports. But domestic-demand growth is anemic in surplus countries for cyclical and structural reasons. So a recovery of the global economy cannot occur without a rapid and orderly adjustment of global current account imbalances.

Meanwhile, the adjustment of U.S. consumption and savings is continuing. The January personal spending numbers were up for one month (a temporary fluke driven by transient factors), and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth).

In the years when stock markets and home values were going up, the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.

But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%), the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth, personal savings is not 5%, as the official NIA definition suggests, but rather sharply negative.

In other terms, given the massive destruction of household wealth/net worth since 2006-07, the NIA measure of savings will have to increase much more sharply than has currently occurred to restore households' severely damaged balance sheets. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.

In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).

Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.

Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers' market rally will fizzle out later in the year, like the previous five ones in the last 12 months.

In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).

Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.

But even in this case, the distinction is only between partial nationalization and full nationalization: With 36% (and soon to be larger) ownership of Citi (nyse: C - news - people ), the U.S. government is already the largest shareholder there. So what is the non-sense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.

Ditto for AIG (nyse: AIG - news - people ), which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.

Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.

News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.

So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.

And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.

Financial stocks helped New York's stock indexes edge higher at the open Tuesday, despite a multibillion-dollar loss from a Wall Street heavyweight. Meanwhile, consumer prices tumbled, according to government data, and new housing construction hit record lows.

All of the morning's news comes as the Federal Reserve wraps up its two-day monetary policy meeting, which is expected to conclude with another cut to benchmark interest rates. The fed funds rate currently stands at 1.0%, but the expected cut to 0.5% would be little more than a formality, since the effective fed funds rate has been trading below that level since mid-October. The central bank's statement will be closely watched for hints toward the Fed's next move, and perhaps a further expansion of its balance sheet through purchases of Treasury bonds or agency debt.

Before the Fed took center stage, Goldman Sachs (nyse: GS - news - people ) made the morning's biggest headlines, recording the first red ink in its 10-year history as a publicly traded company. The firm booked a loss of $4.97 a share, or $2.1 billion, as revenues tumbled across most of its businesses. The news did little to shake investors' faith though, as Goldman shares started the day up $3.00, or 4.5%, to $69.46. Rival Morgan Stanley (nyse: MS - news - people ), which reports fourth-quarter results Wednesday, tacked on 47 cents, or 3.5%, to $14.11.

Shortly after the open, the Dow Jones industrial average gained 55 points, or 0.6%, to 8,619. The Standard & Poor's 500 added 9 points, or 1.1%, to 878, and the Nasdaq was up 21 points, or 1.4%, to 1,529. Volumes were light as investors treaded water before the Fed's statement.

The Labor Department said its Consumer Price Index came in at -1.7% for November, thanks in large part to cheaper oil prices. Excluding fuel and energy costs, the index was unchanged from the month before. The inflation gauge has cooled considerably since the summer, when record fuel costs sent the reading on a dizzying rise. (See "Consumer Prices Take A Dive.")

Crude oil was up 33 cents Tuesday, but still trading at just $44.84 a barrel. United States Oil Fund (nyse: USO - news - people ), an exchange-traded vehicle that tracks crude and other products, gained 84 cents, or 2.3%, to $37.68 early in the session. (See "OPEC: All Eyes On Russia.")

On the housing front, the Commerce Department recorded 625,000 housing starts in November, down 18.9% from the October estimate, and off 47.0% from November 2007. New building permits were at 616,000, down 48.1% from the year before, while housing completions were just below 1.1 million, 22.8% below the year-prior figure. But the drop in starts can be taken as a blessing in disguise, since the glut of inventory that home builders face will be helped by fewer new homes on the market.

Many small community banks are growing frustrated about their inability to access the government's $700 billion financial rescue fund, nearly two months after large banks began tapping the fund for much-needed capital.

Trade groups representing the banks complain that the delay is putting smaller institutions at a competitive disadvantage to publicly traded banks, more than 50 of which have received capital injections.

"They took care of Wall Street first, and it seems like Main Street got left behind," said Cynthia Blankenship, vice chairwoman of Bank of the West in Irving, Texas, which has $250 million in assets. Blankenship is also chairwoman of the Independent Community Bankers of America.

Some small banks, especially in areas such as California and Florida where the housing slump hit hardest, carry troubled real estate loans and likely would benefit from the government cash, Blankenship said.

Publicly traded banks have been eligible since the Treasury Department began the $250 billion capital injection program Oct. 14. The department opened it on Nov. 17 to about 3,800 small, privately held banks. A few publicly traded community banks already have received government money.

But the department has yet to issue the necessary guidelines for about 3,000 additional private banks. Most of them are set up as partnerships, with no more than 100 shareholders. They aren't able to issue preferred shares to the government in exchange for capital injections, as other banks can.

The Treasury Department has come under fire from members of Congress for not ensuring that the capital injections lead to more lending. The ICBA also argues that healthy smaller banks are more likely to use government money to make loans than are big banks that need to shore up their capital after writing down billions in mortgage-related losses.

Hundreds of the banks have applied for government money, the ICBA said in a letter Tuesday, as a precautionary step. But they can't access the money.

As a result, the government needs to figure out what it can receive in exchange for capital. Treasury officials say they are working on it but that the task is technically difficult.

"I have not seen a good answer yet," Neel Kashkari, director of Treasury's Office of Financial Stability, said Monday at a housing conference.

The vast majority of small banks are financially healthy, the ICBA says. Most did not get caught up in the housing meltdown that has so damaged Wall Street banks. But groups such as the ICBA say the rescue fund is supposed to be available to all healthy banks.

Banks that aren't eligible may lose out to other lenders that have received government money, the American Bankers Association added in a letter Dec. 5 to Treasury Secretary Henry Paulson.

"They can only watch while many of their competitors, strengthened by capital injections from the government, seize opportunities to meet credit needs of their communities," the ABA letter said.

Rep. Paul Kanjorski, a Pennsylvania Democrat, urged Treasury Secretary Henry Paulson in a letter Dec. 5 to open the program to the remaining small banks by the end of December.

Bert Ely, a banking consultant, said one possible solution would be for the government to receive some type of debt instrument rather than equity.

The Treasury Department is still struggling to hire enough staff to operate the capital-injection program, the Government Accountability Office, an auditing agency, said in a report earlier this month.

The department has handed out more than $155 billion to 77 banks. Of that sum, $115 billion has gone to the eight largest, including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co.

Some smaller banks that haven't yet been able to access the federal money are particularly irked by the efforts of nonbank financial institutions, such as life insurers and credit card companies, to get a slice of the money. At least four life insurers, including Hartford Financial Services Group Inc. and Genworth Financial Inc., are seeking to buy small thrifts to become eligible for the capital injections.

"The law was passed to help banks, and now companies are trying to get in front by becoming a bank," said Paul Merski, chief economist for the ICBA, which has about 5,000 members. "It's a little bit frustrating."

The banks that aren't eligible control just a small slice of the nation's banking assets. They make up about one-third of community banks, which the Federal Deposit Insurance Corp. defines as banks with less than $1 billion in assets.

Overall, community banks hold 11 percent of the industry's total assets, according to Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. Still, they play a vital role in small business and agriculture lending.

Community banks provide 29 percent of small commercial and industrial loans, 40 percent of small commercial real estate loans and 77 percent of small agricultural production loans, Bair said in congressional testimony last month. The FDIC doesn't have more precise data for the type of banks that aren't eligible for capital injections.

The delay in accessing the rescue money is just one aspect of the program that has frustrated small community banks and their directors.

The government has said the $250 billion it set aside for capital injections is intended for healthy banks. Yet the money has been widely referred to in press reports as a "bailout." As a result, many well-capitalized banks worry that if they take money from Treasury, their customers might see them as weak, Blankenship said.

Conversely, if they don't receive any funds, customers might wonder if they were turned down, she said. Treasury lists banks that have received money. But it won't say which banks have applied.

Finally, the ICBA has raised concerns about a measure governing the capital injections that would let the Treasury Department "unilaterally amend" the program. For example, Congress could require banks that have received government money to do more lending, Merski said.

"That's a bit concerning," said Dan Blanton, chief executive of Georgia Bank & Trust, based in Augusta, Ga. "If they decide they want to change the rules after you've taken the money ... you have to live with it."

Still, Blanton said his bank has applied for federal funds, though he hasn't decided yet whether to take the money if his bank is approved.

Federal agencies and trade groups have encouraged banks of all kinds -- including those not yet technically eligible -- to apply for the capital, to preserve the option. More than 1,000 community financial institutions have applied, Bair said in her testimony last month.

But some small banks that are eligible are saying no. Financial services firm Keefe, Bruyette & Woods said in a recent report that at least 82 banks have publicly said they won't seek funds.

Evergreen Federal Bank, based in Grants Pass, Ore., for example, has a link on its home page that reads, "We Don't Need a Bailout."

Charter Communications Inc. said Friday that it is beginning discussions with its bondholders about financial options to improve the cable operator's balance sheet.

"We believe engaging in discussions with our bondholders, aimed at improving our capital structure and enhancing our financial flexibility, is in the company's and our customers' best interests," said President and Chief Executive Neil Smit in a statement.

Last month, Charter reported it narrowed its third-quarter loss as customer sign-ups for new lines of service surged 50 percent.

But the St. Louis-based company, which is controlled by Microsoft Corp. (nasdaq: MSFT - news - people ) co-founder Paul Allen, has continued to struggle with its debt burden. It reported interest expenses of $478 million in the third quarter, eclipsing its $208 million in operating income.

As of Wednesday, Charter said it had more than $900 million of cash on hand and cash equivalents available to pay operating costs and expenses.

Charter is the nation's fourth largest cable TV operator behind Comcast Corp. (nasdaq: CMCSA - news - people ), Time Warner Cable (nyse: TWC - news - people ) Inc. and Cox Communications.

Charter's financial adviser is Lazard LLC. Charter's shares were roughly unchanged at 16 cents in morning trading.

I recently spent a few days in Moscow meeting with a variety of economic and financial officials and analysts, both in the public and private sector.

Until July of this year, Russia was rosy: It was growing at an annual rate close to 8%; oil prices were peaking at $140 a barrel; the country was running a large fiscal and current account surplus; it had a war chest of $600 billion-plus of foreign reserves; and its stock market, bond markets and currency values were strong. Policy makers were thinking of turning the ruble into a major reserve currency, at least for the CIS bloc.

This economic and financial success led Russia to flex its geopolitical muscle, challenging the U.S. on a number of political and military issues and using its energy power as an instrument of foreign policy in its relations with the Eurozone and its former Soviet neighbors. The peak of this resurgence of the Russian bear came during the August war with Georgia, when Russia flaunted its military power as the U.S. looked impotent in its inability to defend an ally.

But what a difference a short time makes. Six months later, Russia is in deep economic and financial trouble.

The S&P has just announced that it has lowered Russia's foreign-currency credit rating by one notch from BBB+ to BBB. In less than six months, oil prices have fallen to under $50 a barrel (from the $140-plus peak of July). The stock market has fallen by over 60%, and on some days it has been shut down to prevent a free-fall. The current account surplus has turned into a near deficit and a sure deficit by 2009. The country has experienced a capital flight of over $100 billion and has lost about $150 billion of foreign reserves (now down to about a $450 billion level). It is facing massive external debt-financing problems as its banks financed their lending with foreign currency borrowings and its corporate firms financed massive expansion with foreign currency debt. It is now desperately trying to prevent a sharp depreciation of its currency by aggressive foreign exchange intervention. It may face a large fiscal deficit (2% of GDP) next year, and its GDP growth rate is sharply slowing down, leading the World Bank to predict a rate of only 3% in 2009--with leading local analysts predicting an actual recession (negative growth of as much as -2%) in 2009. (See the recent analysis by RGE's Rachel Ziemba for more on the risks of a hard landing in Russia.)

Given this sudden change in Russian fortunes, there are several key policy issues that the authorities need to deal with. Of course, given the external shocks (terms of trade worsening and a sudden stop of capital and credit), it was important to use the buffer of foreign reserves to avoid a bank run by providing liquidity and capital to banks--and by providing a fiscal stimulus to a country that is sharply slowing down.

But the key unresolved policy issue is what to do with the exchange rate. Until recently, Russia was on an effective basket peg (with 55% for the dollar and a 45% weight for the euro). But with oil prices now down over 60% from the peak of the summer, and with incipient current account and fiscal deficits and a likely recession in 2009, the currency is obviously overvalued. A reasonable estimate of the needed exchange-rate depreciation--with oil at about $50 a barrel in 2009--is 25%. But until recently, the authorities resisted the needed depreciation through aggressive foreign exchange intervention.

Financial Career Options

Believe it or not, there are still jobs in finance. Here's a look at some career paths.

For the business graduate, obtaining a degree is just the beginning. What's left is to take a closer look at available career options, measuring which industry sectors have the greatest need for new professionals. The finance industry is multifaceted, offering a variety of positions catering to a number of different skills and interests.

Financial services have multiple sub-industries encompassing niche opportunities. The key to individual success is to research, locate and land the financial job that has the greatest compatibility with your skills and interests. The same is true for professionals seeking a change in scenery and who want to give a new sector a shot.

Here are some common career paths you may pursue in the financial-services industry:

Corporate finance: These jobs involve working for a company in the capacity of finding and managing the capital necessary to run the enterprise. This is done while maximizing corporate value and reducing financial risk.

The functions you may implement while in such a position include: setting up the company's overall financial strategy; forecasting profits and losses; negotiating lines of credit; preparing financial statements and coordinating with outside auditors.
More sophisticated corporate finance jobs might involve mergers and acquisitions activity, such as calculating the value of an acquisition target or determining the value of a division for a spin-off.

Corporate finance positions can be found in companies of all sizes, from large, international entities to small start-ups. Additional corporate finance positions include financial analysts, treasurers and internal auditors. (Learn more about a career as an analyst in "Becoming A Financial Analyst," and as an internal auditor in "An Inside Look At Internal Auditors.")

Commercial banking: Commercial banks, from large entities to local institutions, offer a range of financial services, from checking and savings accounts to IRAs and loans. Career options available in this sector include bank tellers, loan officers, operations, marketing and branch managers. Talented professionals can advance from a local branch job to a position in corporate headquarters. Such a promotion would expose you to a number of other areas, such as international finance. (Learn more about a career in institutional marketing in "The Marketing Director's Pitch.")

USA-OBAMA/REGULATIONS (URGENT):Obama vows to unveil strong financial regulations

WASHINGTON (Reuters) - U.S. President-elect Barack Obama said Sunday that a strong package of financial regulations will be central to the economic recovery package that his administration will roll out next year.

"As part of our economic recovery package what you will see coming out of my administration right at the center is a strong set of financial regulations which banks, ratings agencies, mortgage brokers, a whole bunch of folks (will) start having to be much more accountable and behave much more responsibly," Obama said in taped interview on NBC's "Meet the Press" program.

What Would Keynes Do?

The government should spend on stuff, not on bad assets.

Every day that goes by makes clearer the parallels between the current financial crisis and the one that led to the Great Depression. Then, as now, the core problem was one of deflation, or falling prices. But fixing it will require more than just low interest rates. This was the key insight of British economist John Maynard Keynes, whose theories finally explained how to end the Great Depression. They may be the key to solving today's crisis as well.

The Great Depression was so deep and prolonged for many reasons. Herbert Hoover stupidly signed the Smoot-Hawley Tariff, which crippled international trade and finance, and imposed one of the largest tax increases in American history in 1932, which was exactly the wrong medicine at the wrong time. Franklin D. Roosevelt at least understood that deflation was at the root of the problem, but he thought artificially raising the price of gold and preventing businesses from cutting prices and wages by law was the solution. In fact, it prevented the economy from adjusting, which made the situation worse.

What few people understood at the time was that the Federal Reserve was primarily responsible for the deflation and the only institution that could have done anything about it. As we now know, the Fed's tight monetary policy brought on a financial crisis that began with the stock market crash in 1929. Smoot-Hawley was also a factor, but it wouldn't have been capable of inducing such a crisis if Fed policy hadn't already put financial markets in a fragile condition.

In its initial stages, the Fed might have been able to prevent a full-blown depression by being a lender of last resort. It should have been aggressive about buying every financial asset it could lay its hands on and created as much money as necessary to do so. But it didn't. Instead, it was passive and, as the value of financial assets collapsed, banks closed and vast amounts of wealth simply vanished.

The money simply disappeared, because there was no federal deposit insurance in those days. According to research by economists Milton Friedman and Anna Schwartz, the nation's money supply fell by one-third between 1929 and 1933, which induced a 25% fall in price levels over that period.

As prices fell, businesses were forced to sell goods for less than they cost to produce. They couldn't cut costs easily because that meant reducing wages, which workers naturally resisted. Layoffs were the only way to cut costs, but this meant workers didn't have any income with which to buy goods, since there was no unemployment compensation either. This created a downward spiral that proved very difficult to stop.

The decline in wealth also reduced spending, and the fall in prices had the effect of magnifying debts. Debtors were forced to repay loans in dollars worth 25% more than those they borrowed in the first place. Farmers, who are perpetually in debt, were especially hard hit. In effect, if they took out loans that were worth X number of bushels of wheat and were forced to repay them with the same number bushels, they needed 25% more bushels to repay.

U.S. Jobs Even Weaker Than Feared

American non-farm payrolls declined more than expected in October.

Europe Slides On U.S. Jobs Data

European equities dropped as data showed unemployment in the world's largest economy had spiked in October.

Sovereign Funds' $2 Trillion Setback

The blistering pace of growth for state-backed funds is slowing, and they will invest less in advanced economies in the coming years.

South Korean Rates: A Snip Follows A Slash

The Korean central bank cuts rate again, but not as much as before.

Hedge Fund Exit Strategies

Investors need to know their options for getting their money back, especially when the market swoons.

IMF: Global Growth Sloooows

International Monetary Fund says world growth will slow to 2.2% next year while advanced economies will shrink.

Sen. Barack Obama, so steady in public, did not hide his vexation when he summoned his top advisers to meet with him in Chicago on Sept. 14.