More than five years after the financial bust of 2008, the ultralow interest rates engineered to repair the damage may come to an end soon.
That prospect is spooking financial markets from Wall Street to Shanghai. Investors are worried that it may be too early to wean the global economy off a half-decade of easy-money policies that created record-low interest rates to spur growth.
Stocks dropped again Monday, though the markets recovered some of their losses later in the session. The Dow Jones Industrial Average shed nearly 250 points before making up some of that ground, closing 140 points lower. The S&P 500 and the Nasdaq also finished off their lows.
Bond prices tacked on gains, extending the volatile trading that has gripped markets for the past week.
There's reason for concern. Investors hate uncertainty, and few people alive today have ever been through an economic and financial cycle like this one. The financial panic of 2008 was deeper than any since the Great Depression, and the remedies applied by the Federal Reserve have never been attempted on such a giant scale.
But the issues behind the gut-wrenching market plunge of the last week are pretty easy to identify. Here are the big ones:
Why are interest rates moving higher?
Soon after the collapse of Lehman Brothers in 2008, the flow of capital froze as banks and investment firms feared lending to one another. No one knew which bank might be the next Lehman. The global credit machine completely seized up.
To restart lending, central banks began pumping trillions of dollars into the financial system. Since then, the Fed has continued spraying $85 billion a month of surplus on the credit markets to keep rates low.
But at its regular policy meeting last week, central bankers said they're getting ready to "taper off" that flow of cash. With less money sloshing around, the cost of borrowing will begin to rise.
That means I'll get a higher return on my savings account, right? What's wrong with that?
Nothing, as long as the economy keeps humming along and employers keep creating jobs. But the worry is that higher rates could make consumers more reluctant to use their credit cards or could cause potential home buyers to think twice about taking out a mortgage.
The Fed thinks the economy may be nearly ready to sustain higher rates, though. Consumer confidence and spending are gaining momentum, partly because house prices have begun recovering and the job market continues to improve, albeit slowly. And though stock prices have fallen nearly 5 percent in just the past four sessions, prices are still 20 percent higher than they were a year ago. That extra stock market wealth has helped fill in the $7 trillion crater in household wealth created by the twin collapses of the housing and financial markets five years ago.
Is the market going lower?
Yes. And then higher. But we have no idea when. Or how far. This is not a psychic hotline.
If the folks at the Fed spooked the markets, can't they calm them down again?
Yes and no. Chairman Ben Bernanke has made it clear that as central bankers begin slowing the flow in the money fountain, they can always restore full pressure if the economy falters or the markets begin to tank. And the Fed hasn't actually started to taper but is just telling the world it's beginning to think about how and when to do so.
While the Fed's money machine is the biggest in the world, and the dollar is the closest thing to a global currency, the U.S. central bank isn't the only game in town.
The latest market jitters have been heightened by a much more immediate—and severe—credit clampdown in China. On Friday, the People's Bank of China (the country's central bank) tried to cut off the financial oxygen of a loose network of speculators and informal lenders who have been inflating a bubble in stocks and real estate. In doing so, the PBOC let short-term interest rate spike as high as 25 percent.
That sounds a lot like the kind of credit crunch that started this whole mess five years ago.
It certainly spooked investors globally, and that's why stocks markets have fallen in unison over the last few sessions.
But there's a big difference between Lehman Brothers' panic-induced collapse and the PBOC-engineered Chinese credit crunch. China's central bankers can restore the flow of credit with the click (or two) of a mouse.
That makes the squeeze there more like the U.S. interest rate spike of the early 1980s, when Fed Chairman Paul Volcker all but strangled the bond market. Volcker's move then was designed to snap a decade of runaway inflation and to reignite growth. The medicine worked. Once inflation had subsided, the Fed let rates fall, and the economy and stock market roared back to life.
China faces a different set of problems, and its state-owned banking system is very different from the one in the U.S. But the credit vise gripping Asia could easily be loosened.
Chinese officials are betting that their actions will throw enough cold water on speculators and shadow-bank lenders to prevent another bubble-bust cycle.
But there's not a lot that Bernanke and his Fed colleagues can do if the PBOC bets wrong.
—By CNBC's John W. Schoen. Follow him on Twitter