Anyone gripped by the tale of beleaguered mortgage lender Countrywide Financial( CFC) should find a new book about a long-ago financial crisis compelling reading.

Apart from some trivial details,

The Panic of 1907

by Robert Bruner and Sean Carr, which gives a blow-by-blow account of a particularly trying period in U.S. economic history, reads like the coverage of the present crisis chronicled on these Web pages.

What's more, the authors' analysis goes a long way to spotlighting the reality that there may be worse yet to come in our contemporary situation, despite last week's

Federal Reserve

move to provide the markets some relief by lowering the interest rate at which it lends to banks.

Radiating Panic

The book begins with the 1906 San Francisco earthquake and charts the lurches, lists and gyrations of the financial markets through the apex of the crisis in October 1907 and the return of relative tranquility a month later.

The quake, and subsequent fire that destroyed San Francisco, came after a period of very robust economic growth and placed the entire financial system under a huge strain. As the magnitude of the damage to San Francisco became clear, British insurers sold their stock holdings and shipped gold off to the U.S. West Coast to fund the city's reconstruction.

Then, unlike now, there was no central bank to provide an economic cushion -- looser monetary policy -- in the wake of the disaster.

Under the workings of the gold standard that then prevailed, the money supply, and hence credit, could only increase when more gold was available.

But because loads of bullion were leaving for the West Coast, by the spring of 1907 a so-called "credit anorexia" developed in London and New York City as the financial system was stretched beyond capacity, the authors say.

As if that wasn't enough, a failed attempt at manipulating shares of

United Copper

TheStreet Recommends

resulted in one brokerage firm, Gross & Kleeberg, closing shop in October 1907 after the scheme's perpetrators, the Heinze brothers, refused to pay for shares they'd ordered. That put further pressure on the financial system, and before long the Heinzes' own company went under, which in turn stressed a major New York bank.

Then things got really bad, but that's also where the similarities to the current situation start getting uncanny.

The Hedge Fund Hustle

A century ago, as now, lightly regulated financial entities had come to dominate the milieu. In 1907, it was the trust companies pushing out the traditional banks, while today it's hedge funds and private equity. Both benefited from skirting regulations to the advantage of their often well-heeled clients.

Specifically, the trusts of 1907 could keep lower cash reserves than traditional banks, and so could give their customers higher returns. But that, along with a lack of transparency about the firms' inner finances, also meant trusts were much more susceptible to bank runs, in which depositors attempt to withdraw their savings en masse.

Because deposit-taking institutions typically keep only a small percentage of cash on hand, the result of a run is frequently the failure of the institution. The lack of financial transparency only adds to such jitters.

Due to the way financial markets and institutions are interlinked, the demise of one firm, such as Heinzes' stockbroker, can frequently precipitate runs on other firms. As Bruner and Carr say, "Trouble travels." And in 1907 that's exactly what happened, but with no Fed to help calm market participants (it was formed in 1913 in response to the '07 mess), it looked like things might spiral out of control.

Legendary money wizard J.P. Morgan, however, then stepped up, corralling a group of financiers to provide capital to help shore up faltering institutions. But even Morgan couldn't save the Knickerbocker, one of the largest trusts in the country, as panic truly started to take hold in October 1907 -- similar to Countrywide's current woes.

Perhaps the most worrying present-day corollary to the bank run, however, is hedge fund redemptions.

Poor returns at some funds caused by the mess in the subprime mortgage market will likely lead to some significant withdrawals. What will be the overall magnitude of those cashouts?

The lack of transparency within the hedge fund world only increases the uncertainty, and may even induce some present-day investors to throw in the towel simply because they cannot discern what's really going on.

While uber-rich hedge-fund investors reeling from a bad month in the market may not be the most sympathetic characters, the rest of investors should care how they react -- the financial markets are all interlinked. That's how the deteriorating subprime mortgage market may eventually suck down all assets from stocks to corporate bonds through to gold, oil and soybeans.

It's clear from

The Panic of 1907

that Morgan was a hero for charting a course through a financially stormy period; whether Bernanke has the deft touch required to right the listing liner that is the U.S. economy, or whether his 50-basis-point cut in the discount rate was more akin to a finger in the dike, remains uncertain. Time will no doubt tell.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.