(FORTUNE Magazine) – As Vietnam was the first war fought on TV, so the crash of 1987 was the first stock market panic to unfold on camera, the first to be instantly communicated visually around the world. It brought home the reality of the global markets of the 1980s, a world where even in St. Louis in mid-World Series the Tokyo market close could take top billing over the baseball score on the evening news. And it left U.S. leaders with a double challenge: to avoid mistakes that could precipitate economic chaos, yet to seize the day to make some needed repairs to the economic order. Policymakers can keep prosperity percolating along -- or, for all the talk about post-1929 safeguards, they can bring on a paralyzing, fin de siecle world depression. ) ''Sweetheart, my world is coming to an end,'' one broker shouted into the phone on Black Monday, October 19. But now that panic has modulated into edgy and watchful concern, it is clear that the biggest change is less in the world itself than in how we perceive it. The real transformation is yet to come. For as investors, consumers, and especially governments act on their altered perceptions, they will create the economic order of the 20th century's waning years. Until now, this has always been the ''Yes . . . but'' boom. Sixty months of economic expansion, yes . . . but we have been consuming more than we produce, borrowing from abroad, and selling off pieces of America for ever cheaper dollars. A U.S. industry restructured for competitiveness, yes . . . but unemployed steelworkers, loggers, and oil-field workers are among those in shelters for the homeless. A soaring stock market, yes . . . but it has spawned a class of baby magnates who are sometimes shameless in their business practices and their self-cherishing materialism. With so many misgivings lurking behind the optimism, it hardly needed program trading to bring about a 508-point drop in the Dow. Above all, the laws of financial physics explain the crash: The market had reached altitudes where the atmosphere was too thin to support it. No single event, but a swarm of converging causes -- among them Treasury bonds breaking the 10%-yield barrier and Treasury Secretary James Baker threatening to beat down the dollar if the Germans raised interest rates -- provoked the panic. Now, however resilient the underlying economy, that shattered investor confidence, that change from ''yes'' to ''but,'' has become one of the fundamentals of the new bear market. At worst, investors could prove so unnerved that stocks would have to get cheap to lure them back. Belief will determine reality not just for the market but for the economy itself, as consumers -- feeling poorer from stock losses or worried about their jobs -- curb their buying, leading producers to scale back in turn. So far FORTUNE foresees not a recession but only a slowdown -- from a GNP growth rate of 2.5% in 1988 to a more sedate 1.8%. Many economists would welcome that. A chill on consumers could be ''just what the doctor ordered,'' says neo-Keynesian Paul Krugman of MIT. Reduced consumer spending will shrink the U.S. trade gap that gnaws at worldwide investor confidence, and could boost the nation's savings rate. But too much consumer and business caution would convert slower growth into recession. PEOPLE OFTEN SPEAK as if the 1929 Crash made the Great Depression of the Thirties inevitable. It did not. It took policymakers, embracing one wrong choice after another, to lock the world into that gloomy fate. Some of their successors are clamoring to make similar mistakes. Take fiscal policy. President Hoover earnestly tried to balance the federal budget, but his deflationary maneuvers did much to throw the country into depression. Now some business economists and Democratic legislators want stiff tax increases to reduce the current budget deficit. But too sharp a reduction in the deficit, along with the falloff in consumer spending that higher taxes would bring, could take enough steam out of an already slowing economy to produce recession -- or worse. By reducing economic activity, which would cut tax revenues, a recession would expand the deficit, not contract it. Many believe that the deficit is not just an imbalance on the way to being corrected but an overwhelming threat to world economic stability and to Americans yet unborn. If it grew, or if a recession caused it to soar -- that would be true. But it had come down even as the market crashed. Says Morgan Stanley economist Robert Gay: ''The economy's not the problem. Confidence is.'' To foster confidence, the government now needs to show that it will continue to reduce the deficit gradually without wrecking the economy. Says Nobel Prize-winning economist James Tobin of Yale: ''A recession would not be a confidence-building episode.'' For this year, a $25-billion to $30-billion reduction would be credible without being destructive. President Reagan will have to accept tax increases to get Congress to cut spending: Let them be of the sin and gasoline variety. But the real key is cutting federal outlays. Even that course, too zealously pursued, could bring on recession. THE PROTECTIONISM of the Thirties proved so destructive as to make the Smoot-Hawley tariff of 1930 a byword for the wrong policy at the wrong time. But behold a trade bill growing like some pale mushroom in the dank recesses of Congress, as if putting a fence around America could make our blast furnaces smoke and our TV assembly lines roll as merrily as when Ike was in the White House. Now more than ever prosperity depends on a free global economy, with huge and growing global markets. As an economic entity, the mercantilist nation-state is a dinosaur, though politicians and voters generally fail to recognize it as such. For instance, if German policymakers would stimulate their economy and quicken consumer demand, instead of crowing over their trade surplus and fighting nonexistent inflation, the U.S. trade deficit would shrink significantly. The one great Depression-era mistake that policymakers are avoiding is the tightening of the money supply that aborted recovery in 1931 and 1932 and contributed to the collapse of the banking system. This time, by contrast, the Federal Reserve under Alan Greenspan has quickly pumped in money and reaffirmed its responsibility as lender of last resort. Says economist Milton Friedman: ''The effect of the market crash is to make a recession beginning in the next six to eight months less likely.'' By pushing down interest rates, the Fed has already begun to weaken the dollar. This leads some to fear that foreigners might stop providing the capital needed to fund the U.S. debt. But since the trade deficit leaves the U.S. with much less foreign currency than foreigners have dollars, foreigners can cash in only a small amount of the U.S. currency they hold. Lower interest rates could lead them to invest their dollars in stocks rather than bonds, but that flight would be self-limiting: Interest rates would rise, drawing investors back to bonds. Their only real way to dump a lower-valued dollar would be to buy U.S. goods. One thing that the crash of '87 does not tell us is that the economic expansion has been a chimera, that seven years of Reaganomics have built only a house of cards. What government leaders like Reagan and Baker need to do is not change policy radically but rather show that they have a policy and can explain it to a confused, anxious citizenry.