2008 will likely be known as the global economy's worst year in decades. What began as a modest U.S. economic downturn accelerated into a full-blown credit and financial crisis that spread around the world.  

Congress passes economic stimulus package

2008 began with signs that the U.S. economy was slowing, but no real warning of the gut-wrenching financial meltdown that was to come. In February, the U.S. Congress passed an economic stimulus package of tax rebate checks to dampen the effects of what most economists assumed would be an unremarkable downturn.

But March saw the beginning of a cascade of failures or takeovers of America's biggest investment houses, mortgage institutions, banks, and insurance corporations - all tied to exposure to investments in the once-booming home mortgage industry. Those investments turned sour when U.S. housing prices began to fall and mortgage defaults soared. Record-high spikes in oil prices added to the economic shock.

Economist Jeffrey Kling of the Washington-based Brookings Institution compares the economy to a patient in an emergency room.

"There was a cardiac arrest-event in October where we saw a tremendous freeze-up of the circulation of money through the economy," Kling said. "That was a point when banks were so scared about lending that they would not lend to each other overnight. And that is indicative of people just panicking in that moment, and we have not seen that kind of panic in the United States since the 1930s."

Credit squeeze spreads

The credit squeeze - and the pain it inflicted - quickly spread to Europe, Asia, and elsewhere. Central banks scrambled to inject cash into the financial system and rescue failing financial firms.

German Chancellor Angela Merkel was one of many leaders to express frustration.

"The credit situation is not at all satisfactory," she said. "The governments have intervened, but we still have a lot of convincing to do so that banks really do what they are expected to do, and that is to give credit."

In China, the head of the government's National Development Commission, Zhang Ping, recently said he is bracing for even-greater economic fallout.

"The current international financial crisis and its impact has not yet been fully felt. This crisis is spreading all over the world, and its impact on China's economy is deepening," Zhang said.

Financial bailout plan approved

In October, the U.S. Congress authorized $700 billion to bail out U.S. financial firms. Overseeing the funds is Treasury Secretary Henry Paulson, who has recognized the gravity of the situation while stressing solutions.

"We continue to work through a severe financial crisis. While we are making progress, the journey ahead will be a difficult one," he noted.

The worst economic pain for Americans and people around the world may be yet to come, as many economists predict a long global recession with even-higher rates of unemployment. An entire industry, U.S. auto manufacturing, is considered at risk of failure.

Some observers have compared the current situation to a previous global economic disaster: the Great Depression of the 1930s. That comparison is premature, according to economist Jeffrey Kling.

"At this point we have [U.S.] unemployment rates on the order of 6.5 percent, which is not nearly as bad as it was in 1981, and not anywhere close to as bad as it was in the 1930s," Kling said.

Will stimulus package revive US economy?

President-elect Barack Obama has promised an aggressive jobs creation program to stimulate the U.S. economy. The plan could add hundreds of billions of dollars to America's already-staggering national debt. Ironically, it was debt, in the form of risky home mortgages, that set the stage for the U.S. housing market collapse most often blamed for the current economic meltdown.