IMPEACH BUSH

NEW YORK — It started as a panic attack, soothed by assurances that the problem was limited to a relatively small number of reckless home loans. Now it's clear the crisis is anything but contained and the nation's financial system is dangerously close to the edge.

It may well pull back. But as policymakers try to guide the economy across a frayed tightrope, it is growing increasingly difficult to know whether the worst is behind us or if problems could spin further out of control.

"The entire world economy is being held hostage to the welfare of the financial community because we're talking about an industry that provides credit, which is the lifeblood of business and consumer spending," said Bernard Baumohl, chief global economist for The Economic Outlook Group in Princeton, N.J.

It has been generations since the economy teetered close to falling into a depression. Could the massive failed bets made by Wall Street and the desperate efforts to stem the damage sentence the economy to years of stagnation, or worse?

Policymakers and economists have a much better understanding of how the financial system works now than they did during the Great Depression, where it's widely agreed that much of the damage came because of a failure to act.

The lessons learned from the past go a long way to protecting the economy against present dangers. But they don't eliminate them.

"This is the biggest risk we've had in a long, long time," said Joel Naroff, of Naroff Economic Advisors in Holland, Pa.

Already one of Wall Street's most storied investment firms, Bear Stearns, has vanished into the abyss. Another, Lehman Brothers, collapsed into bankruptcy early Monday. A third, Merrill Lynch, agreed to be sold in a bid to avoid the same scenario.

The Bush administration, which had vowed the let the free market punish risktakers, reversed course when it came to the nation's two largest home finance companies — Freddie Mac and Fannie Mae — and stepped in to take over.

Meanwhile, dark clouds loom over some of the financial world's most well-known companies, including insurer AIG Inc. and Washington Mutual Inc., both scrambling for a lifeline.

"We're definitely living through a moment of history," said Peter Temin, an economic historian at the Massachusetts Institute of Technology.

The crisis gripping Wall Street can seem remote from what's happening on Main Street. But the connections are unquestionable.

Many homeowners are watching the values of their houses plummet, at the same time the flexibility they once had to borrow and buy on credit is being yanked away.

Comparisons to past crises are not easy. The economy has proven surprisingly resilient despite a crisis that is wildly abstract, widespread and as unpredictable as a game of Whack-a-Mole. It doles out punishment on its own terms and forces policymakers and consumers to invent responses on the fly.

"I call the economy right now the Humpty-Dumpty economy," said Eugenio Aleman, senior economist with Wells Fargo & Co.

If federal policymakers don't act fast enough, the economy could take a plunge — in the worst-case scenario, falling into a depression. If they continue to shovel money into the financial system, the economy could fall the other way, into an extended period of sharply rising prices and little growth, Aleman says.

"So the Federal Reserve is trying to make Humpty-Dumpty walk a line on top of that wall, which is a very tough equilibrium," Aleman said.

Will policymakers succeed and keep economic catastrophe at bay?

"At the moment, we seem to be ahead of it, but only barely ahead of it," Temin said.