After Lehman Brothers filed for bankruptcy on September 15, thousands faced layoffs. The headquarters in New York early that day.

By ALEX BERENSON

A LOT OF SMART people have tried to call the bottom on Wall Street this year.
So far, they have all been wrong.
Since the financial crisis first hit in August 2007, markets - and the financial industry - have gone through a series of swoons, each more dizzying than the last. Recently, the crisis reached a new pitch, as Lehman Brothers, the fourth-largest United States investment bank, filed for bankruptcy; the insurance giant, American International Group, which had to submit to a government bailout; and Washington Mutual, the largest savings and loan, saw its shares briefly fall below $2.
Now even Wall Street’s professional optimists have given up predicting exactly when their industry might stabilize. One senior executive at a top investment bank, speaking anonymously, recently observed that there was no ending in sight.
Until now, the cataclysm in the banking and securities industry has damaged but not derailed the rest of the economy, and the Federal Reserve and the Treasury Department signaled that they were not ready to bail out Lehman Brothers with taxpayer money. Economists generally predict that the United States will grow slowly over the next few months but avoid a deep recession, especially if oil prices fall further, easing pressure on consumers, and exports remain strong.
But as the Wall Street crisis moves into its second year, the risks to the overall economy are increasing.
Until the worst turmoil on Wall Street ends, the economy will struggle, said Sung Won Sohn, an economist at California State University, Channel Islands, who studies financial markets.
“Until and unless we have financial markets stabilize, I don’t think we will see a meaningful recovery in housing, and therefore in the economy,” Dr. Sohn said.
Steven Wieting, the United States economist for Citigroup, said: “We’re describing the U.S. economy as recessionary.”
Mr. Wieting - and other economists - say that the Federal Reserve and the government have few good options left to ease the pressure on financial firms or the economy.
The Fed has taken several measures to buoy the financial industry, such as allowing more banks access to low-interest, short-term loans. Yet Wall Street continues to struggle through the aftereffects of the biggest speculative bubble in history.
Financial services companies have cut more than 100,000 jobs this year, according to Challenger, Gray & Christmas, an executive placement firm, and deeper layoffs may come this fall, including thousands of workers from Lehman and possibly Merrill Lynch, which was quickly sold to Bank of America the same weekend Lehman filed for bankruptcy.
Yet the picture may not be entirely bleak. When the chaos finally ends, Wall Street will almost certainly be smaller and more risk-averse. That change could eventually put the economy on firmer footing.
This year’s crisis appears to mark the end of a bubble in the financial markets that has lasted nearly two decades. The speculation began in technology stocks in the 1990s and turned to real estate, commodities and private equity buyouts this decade. Along the way it powered the New York City economy and helped drive income inequality nationally.
While the stock market has not been as frenzied this decade as it was at the end of the 1990s, rampant speculation took over many other financial markets, Mr. Wieting said. “In the last couple of years, financial activity became less related than we’ve seen before to real economic developments,” he said.
Now Wall Street is reeling, as a significant fraction of the speculative real estate loans that banks made during the boom years are worthless. Because banks have limited capital to absorb losses, investors worry that those losses will overwhelm them.
The problem has been worsened by the financial instruments that banks and hedge funds and insurance companies have created to swap loans and risk with each other. In theory, those products can help investors and companies diversify risk, but they are nearly impossible to value.
“Investors just don’t know what these assets are worth,” said Ed Yardeni, president of Yardeni Research. “There’s no transparency.
It’s totally up to management to decide what these assets are worth and tell their accountants.”
For example, Lehman said recently that it had $20 billion in tangible equity . But shareholders valued Lehman at only $2 billion as of September 12, proof that they did not have confidence in the way Lehman had calculated its assets.
Now investors are demanding that banks like Washington Mutual raise capital or sell their assets to raise cash and prove that they are solvent. But when banks are under pressure, they cannot easily find new investors or purchasers for their assets. It is as if a family were told to sell their home overnight, for cash, or lose it. They would surely receive a far lower price than the property would generate in a more orderly sale.
So, one by one, the banks that took on the most risk are facing the real possibility of going under. Those with stronger balance sheets, such as Morgan Stanley and Goldman Sachs and JPMorgan Chase, are suffering much less.
For Wall Street, the lesson has been sobering - and is unlikely to be forgotten for several years, said Dr. Sohn, the California State economist. “We went overboard,” Dr. Sohn said. “As a result, the financial market is imposing some discipline on our behavior, and it’s painful. But that’s how the system works.”