What a difference a day makes.

A couple of days ago, here I was thinking all was relatively calm on world stock markets. The co-ordinated global banking rescues, with governments taking equity stakes in troubled banks, seemed to have done the trick and steadied world stock markets.

Then -- boom. The Dow Jones Industrial Average (DJIA) was savaged Wednesday for a near-8% fall, the 733-point loss being its second-biggest points drop ever, only behind the crash of 1987.

What's changed? Nothing much, as far as I can tell.

I feel confident the worst of the frozen credit markets is behind us. I feel confident banks will lend to one another again, and that they will lend to creditworthy consumers and businesses. The $125 billion Treasury Secretary Henry Paulson used to buy equity stakes in nine banks, including Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), and Citibank (NYSE:C), was a good start. Meanwhile, $125 billion remains for the smaller banks.

Frozen beer and frozen credit markets
Anyone who has tried to drink a frozen bottle of beer will know (a) it's very unrewarding, and (b) defrosting always takes longer, and is more frustrating, than you thought it would be.

Federal Reserve Chairman Ben Bernanke already knows that. On Wednesday, Bernanke told the Economic Club of New York that government efforts to calm financial markets and stem the credit crisis probably won't result in an immediate economic rebound. "Credit markets will take some time to unfreeze," he said.

You don't say, Ben.

I applaud Bernanke for being frank, open and honest, telling it as it is. He might have known his opinions would be viewed negatively by the stock market, but that didn't stop him from telling the truth.

Bernanke is not a politician, so he can be realistic. Compare his realism with President Bush's consistently overly optimistic views of the past few weeks.

We were rich … once
Anyway, the economy is clearly going into recession. The stock market should have known that for a while, but last week it was preoccupied with the global banking crisis, frozen credit markets, saving banks, and possible depression.

Now the market is getting past that phase. But phase two has just hit home. We're staring at a recession, and one that might be long and deep. It's the inevitable consequence of last week, and ultimately, the last five-odd years.

Having gorged ourselves on the abundance of cheap credit the banks were throwing around, fitting our houses and ourselves with the latest modern conveniences, seeing our house prices soar, and enjoying a sharply rising stock market, we all thought we were rich.

But all of a sudden, we're not as rich as we once were. In many cases, we were never rich in the first place, and now we're approaching destitution.

Batten down the hatches
I don't know about you, but I've been battening down the hatches in the last few weeks. I've curtailed spending on non-essential goods and services. I've postponed home improvements. This sort of behavior will be replicated across the Western world.

The economy of today is all about …

  • Reducing consumption.
  • Paying off debt -- for some people, a long and painful process.
  • Hanging onto your job.
  • Being able to afford the next mortgage payment.
  • Rebuilding your savings and wealth.
  • Saving for your financial future.

And you know what? There are no get-rich-quick schemes this time, no easy money. Not the stock market, not residential property, not credit card debt, not home equity withdrawal, and definitely not the lottery.

No wonder we're headed for recession.

China can't help us this time
Not even the great Chinese growth story is going to bail us out, in the near term at least. The CEO of mining giant Rio Tinto (NYSE:RTP) said Wednesday: "In the near term, the Chinese economy is pausing for breath … we expect third quarter economic data to show an exaggerated slowdown reflecting the postponement of projects during the Olympics."

And then there's eBay (NASDAQ:EBAY), which reduced its annual earnings forecast and projected its first quarterly sales decline. It's not the first consumer-facing technology company to warn of slowing sales, and it most certainly won't be the last.

Recessions do end
Stock markets remain fearful. I can't predict the short-term future. I don't know how long we are going to be in recession. I don't know how far unemployment will rise, or for how much longer house prices will keep falling.

But I do know recessions end. I also know share prices start rising again before recessions end. In the meantime, I suggest we all hunker down, ride out the storm, and make sure we're financially fit to ride the inevitable up-wave, whenever that may be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.