08/09/2011 07:03 pm ET Updated Oct 09, 2011

U.S. Economy: No Repeat of 2008 Financial Crisis, But Still Vulnerable To Shock

Even as the stock market has gyrated wildly in recent days, bringing inevitable comparisons to the financial crisis of 2008, economists say a repeat of that episode is unlikely: Bank balance sheets are much stronger this time, the upside of a recent reluctance to lend to all but the most credit-worthy borrowers.

But in some respects, the broader economy is more vulnerable to a shock now than it was during the financial crisis, economists add, citing the marked weakness in the United States and in Europe, where grave concerns about a debt crisis persist.

"The markets are nervous because the level of uncertainty has increased," said Francisco Torralba, an economist with Morningstar Investment Management. "We are facing certain risks that we have seldom seen before."

After a late rally, the Dow Jones industrial average closed Tuesday up 430 points, one day after plunging 634 points on fears of a new global recession.

The closing market surge on Tuesday came after the Federal Reserve said short-term interest rates would remain close to zero through mid-2013, while painting a dark portrait of the overall economy.

Though the Federal Reserve did not announce any new measures, economists looked for meaning in its statement, which said the Federal Open Market Committee "discussed the range of policy tools available to promote a stronger economic recovery" and "is prepared to employ these tools as appropriate."

"It appears they've set the stage for further action," said Thomas Simons, a money market economist with Jefferies & Co.

That action, some economists say, may involve pumping more money into the economy with another round of what economists call "quantitative easing," or injecting vast sums of money into the economy to stimulate growth.

But while that may ease some short-term market anxiety, other threats to the global economy loom in Europe, where authorities on Monday started buying Spanish and Italian bonds in an effort to rescue those countries from financial disaster.

"There's a great deal of fear that the European Central Bank doesn't have the firepower to stop this problem," said Constance Hunter, chief economist at Aladdin Capital Management.

The market volatility began late Friday when Standard & Poor's downgraded the federal debt, triggering the worst sell-off on Wall Street in more than two years. Many investors fretted that a double-dip recession was appearing likelier, and some wondered if the great plunges in the stock market might be laying the groundwork for a repeat of the financial crisis, particularly as major banks such as Bank of America and Citibank saw their values cut down sharply.

But many economists say a repeat of 2008 would be hard to imagine. While economic growth has slowed and unemployment remains high, banks are much healthier now and companies are flush with cash. And even if the economy declined, it would unravel much more slowly than it did three years ago because households and banks have borrowed less.

"The underlying fundamentals, while not great, are not at a level that would warrant a deep financial panic," said Raghuram G. Rajan, an economist at the University of Chicago.

Yet a high level of anxiety still permeates the American economy. And with governments around the world engaged in massive austerity measures, there is no clear spark to trigger a recovery, economists say.

"The government has basically run out of bullets in terms of stimulus," Rajan said.

Many economists still assume that a recovery is unfolding, though a disappointingly weak recovery, further restrained in coming months by nervous consumers holding tight to their ever-shrinking wallets.

"When the dust settles we're going to see an environment where consumers will continue to spend money -- but not a lot," Simons said. "The economy is going to grow, but it's going to grow slowly."