To be sure, there are parallels with the Great Depression. People fear what they don't understand or expect. In the early 1930s, no one really knew why the economy had deteriorated so rapidly. Similarly, much of today's bad news was generally unpredicted: the higher oil prices; the losses on subprime mortgages; the collateral damage to financial markets; the sharp run-up of food prices.

People fear what's next. They worry whether complex financial markets and a globalized economy are unstable. These are legitimate anxieties. Economist Nouriel Roubini of New York University believes additional losses at banks and investment banks are being disguised by lax accounting practices. If so, things might get worse.

Still, parallels are limited. With hindsight, economic historians ascribe the Great Depression to a passive Federal Reserve, which didn't stop bank panics and allowed a dramatic drop in the money supply to worsen deflation. Today, no one can accuse Ben Bernanke's Fed of being passive. It has sharply cut interest rates and, with the Treasury Department, performed repeated acts of artificial respiration on financial markets (rescuing Bear Stearns and, recently, Fannie Mae and Freddie Mac). Indeed, some observers -- including me -- wonder whether the Fed's aggressive policies to prevent an economic downturn might unwisely sanction higher inflation.

We are relearning an old lesson: The business cycle isn't dead. Prosperity's pleasures breed complacency and inspire mistakes that, in time, boomerang on financial markets, job creation and production. Just as expansions ultimately tend to self-destruct, so downswings tend to generate self-correcting forces. People pay down debts; pent-up demand develops; surviving companies expand. The Great Depression was an exception. The present economy would have to get much, much, much worse before it warranted the same appraisal.

© 2008