This is the downturn that wasn't supposed to happen. When bankers were leading the successful effort in the 1990s to build unprecedented...

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This is the downturn that wasn’t supposed to happen.

When bankers were leading the successful effort in the 1990s to build unprecedented national institutions and break down Depression-era regulatory walls, they argued the new giants would be strong and agile.

For a few years, they appeared to be right. The Asian financial meltdown of 1997 bounced off the banks. The recession of 2001 was the first in modern times that didn’t involve a banking crisis.

Now, however, as the economy hovers on the edge of recession, the trouble is centered in the very giants created by the 1990s deregulation and consolidation, including Citigroup and Bank of America. These institutions, along with investment banks such as Merrill Lynch, are struggling not only with the housing collapse, but the implosion of exotic mortgage securities.

Nobody’s worried about bank runs. But the financial giants are ground zero of the credit crisis that began with subprime mortgages and now is spreading to credit cards and business lending. The savings and loan scandal in 1990-91 was costly, but contained. On the other hand, recessions centered in banking tend to be deep and wide.

Seattle’s immediate worry is the damage at Washington Mutual: If that corporate headquarters was lost to a merger, it would cost thousands of high-paid jobs. Microsoft announces earnings on Thursday, giving a sense of how the downturn is spreading into a critical tech sector. Otherwise, the region enjoys one of the nation’s strongest economies, and the housing sector so far has defied a body blow.

Whether more blows are coming remains to be seen after Tuesday’s dramatic announcement by the Federal Reserve that it was lowering the fed funds rate by three-fourths of a percentage point. The Dow Jones industrial average finished well in the red, but recovered from deeper losses in early trading. Now investors will be watching the reaction in Asia and Europe, which suffered deep sell-offs Monday on fears of a U.S. recession.

And yet the Fed, too, is facing many unknowns.

With the increasing globalization of the capital markets, the Fed has far less power than it did in 1987, when new Chairman Alan Greenspan faced a rout on Wall Street.

China, India and the European Union have much greater economic power.

The dollar is less the world’s reserve currency, with the Euro providing a new safe haven. As the dollar has fallen in recent months, dollar-based assets had declined in value, increasing the incentive for investors to cash out. In a world where capital is looking to land in the most profitable spot, lower American interest rates might actually accelerate the process.

In other words, America doesn’t have its old unlimited credit card to solve economic crises.

That credit card has been maxing out with U.S. borrowing, especially from China, to finance historic trade and federal budget deficits. Central banks in China and elsewhere hold vast amounts of dollars, further weakening the Fed’s clout.

The capital markets have also become much more complex since 1987, or even 2001. Instruments such as derivatives defy transparency. Many analysts and economists worry about the effects of a collapsing credit bubble on the trillion-plus dollars in largely unregulated hedge funds.

That’s Wall Street. On Main Street, the credit squeeze is delivering two profound punches. First, homeowners who used rising house values as a piggy bank in recent years are facing falling values, higher mortgage costs and even foreclosure. Second, consumer spending, the great engine of the economy, has slowed. The risk is a self-reinforcing cycle between the two.

Energy prices are also out of the Fed’s control. Sustained increases in oil helped make the recessions of the 1970s especially brutal. They also carried inflationary pressure, which is now a serious concern for Fed Chairman Ben Bernanke (a leading scholar of central banks and recessions), as he is forced to cut interest rates.

The U.S. economy tends to be stronger and more resilient than the bears predict. But the economy is facing more imbalances and pressures than at any time since 2001. Even if stocks stabilize in the coming days, we may not yet have seen bottom.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. He has been a columnist for the Arizona Republic, Charlotte Observer and Rocky Mountain News, and his columns have appeared in newspapers throughout North America on the New York Times News Service and other news services.