In this economy, failure is an option

The trouble was especially surprising because, unlike the typical municipal bond, which requires lenders to fork over funds for lengthy periods in return for fixed interest payments, the bonds at the center of this crisis were so-called auction-rate securities -- on which interest rates are reset daily, weekly or monthly based on the outcome of regular auctions.

In the case of student loans, it was surprising because the federal government guarantees most of the loans -- meaning there was almost no chance that lenders would get stuck with losses if borrowers failed to repay.

Nevertheless, major lenders suddenly retreated from the $330-billion auction-rate market, forcing several states to suspend building projects and delay offering student loans.

The economy has survived such batterings repeatedly over the course of the nation's history and has almost always come back to prosper, said Moss of Harvard University.

"At the moment, the crisis feels like it's everywhere," Moss said. "But that's not that unusual. Crises seem to go away and then pop back up again" before finally ending, he said.

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peter.gosselin@latimes.com