Adding to the economic fears was Washington's new obsession with cutting spending. While closing the deficit is necessary in the long run, doing so won't fight off recession now. By focusing entirely on austerity, many economists say, Washington is throwing away its best tools for boosting growth.
"The most effective fiscal policy action to generate activity and jobs would be a major program of public works to re-employ unemployed construction workers," wrote Nigel Gault, chief U.S. economist of HIS Global Insight. "But we can safely assume that is not on the agenda."
And what's all this about Europe? What does that have to do with my money?
For all the talk of a U.S. debt "crisis" in Congress last month, there was never any doubt that the United States could pay its bills, once Congress renewed its permission to do so. If worse comes to worst (and we're not anywhere near worst), the Federal Reserve can always print dollars to pay, since all of our debts are denominated in our own currency.
That's not true of, say, Greece, Portugal or Spain; all three have slow economic growth, debt burdens worse than ours and have to borrow in a currency they don't control, the euro. Last week, fears rose that the problem was spreading to Italy, where government debt stands at 120 percent of GDP (compared with 75 percent in the U.S.).
"If the crisis were to hit Italy, it would spread also to France, to the rest of the euro area," Domenico Lombardi, a senior fellow at the Brookings Institution told CNN. "And the contagion would spread to the U.S.," because U.S. banks have extensive holdings in European banks.
To fend off that scenario, the European Central Bank — the continental equivalent of the Federal Reserve — began to buy Italian and Spanish bonds, and European stock exchanges stopped speculators from betting on further declines in European bank stocks. Over the Aug. 12 weekend, Italy's cabinet agreed to a plan to cut spending and raise taxes to bring debt under control.
So far, those stopgap measures have helped restore confidence. And that's very important — if anything is likely to bring back a 2008-style financial crisis in the near future, it's not the U.S. downgrade. It's Europe.
So, we're going to have that kind of catastrophe all over again?
For now it seems unlikely. The 2008 collapse was triggered by sudden, massive defaults on private loans, starting with mortgages and the complex securities that depended on them.
Today, by contrast, it's government loans that have people scared. The problems are serious, but they're not coming as a surprise, and authorities have time to work on fixes.
In addition, the financial system is better prepared for trouble this time around. Banks have raised capital, notes Seth Masters, chief investment officer of asset allocation at money manager AllianceBernstein, and U.S. corporations have $2 trillion of cash on hand.