So many things have collapsed in recent months (the auto industry, the stock market, a growing list of daily newspapers) that the announcement of an impending disaster has ceased to qualify as news. Maybe this explains why so few people paid attention when Paul Light, a professor of public service at New York University, predicted not long ago that at least 100,000 nonprofit organizations would disappear over the next two years. Light made his prognostication at a public forum in New York City back in November, before the Madoff Ponzi scheme wiped out institutions such as the JEHT foundation, a leading funder of criminal justice reform; before museums started canceling exhibits they cannot afford to put up; before a coalition of thousands of nonprofit organizations signed a manifesto calling on political leaders to boost support for their beleaguered sector.

The manifesto was issued at a moment of genuine upheaval for the service agencies, cultural institutions and advocacy organizations that make up the sometimes overly sanctimonious but often underappreciated nonprofit world. It's true enough that nonprofits have a tendency to overplay their image as mission-driven organizations motivated purely by selfless idealism. It's also true that nonprofits perform an array of essential functions that shape the texture of daily life in communities across the country, often by helping people whose situations were precarious even before the economy crashed.

Now, with foundations watching their endowments shrivel, individual donors maxed out and states across the country staring at massive budget deficits, a lot of those organizations - soup kitchens, homeless shelters, legal aid groups - are being forced to scale back their services at the very moment when the need for them is escalating. How powerful have the ripple effects of the economic downturn been? "I would not use the word 'ripple' - it's more like a tsunami," says Elam Lantz, the executive director of the Greater Hartford Legal Aid agency, which recently had to lay off six staff lawyers even as the ranks of people who cannot afford a private attorney have soared. The organization is not alone. As the Brennan Center for Justice noted in a recent analysis, "cash-strapped legal aid organizations nationwide are experiencing a tremendous increase in people seeking their services, especially for help with foreclosure cases," even as their budget shortfalls have grown.

The picture is no brighter at advocacy organizations that don't take government money and are now competing for a limited pool of funds. At the ACLU, a $19 million drop in revenue led to the cancellation of various recent projects, followed by the announcement, in January, that ten percent of the national staff was being let go. At the Innocence Project, which has pioneered the use of DNA evidence to overturn wrongful convictions, the collapse of JEHT caused nearly half of the organization's foundation support to disappear overnight. The transformation of the political landscape just made the work of such groups a lot easier, one could argue. On the other hand, to the extent their voices are muted because of a lack of resources, advocates of progressive change risk missing an opportunity that may not come around again. This is the concern of Gara LaMarche, head of The Atlantic Philanthropies, one of the largest, most socially progressive foundations in the country. "If healthcare reform is going to pass, it will probably be this year," says LaMarche. "[It's] not something you can say, 'Ok, it's a bad year; we'll put if of until 2010 or 2011 - it's now or never."

What might be done to minimize the fallout? Some foundations are calling for the creation of a revolving-loans fund backed by the government that would provide urgently needed capital to social service and cultural institutions they can't support right now. At a time when taxpayer dollars have been showered on the likes of AIG, such a fund seems like the least the government could do for a sector whose leaders did not push for reckless deregulation or pay themselves exorbitant bonuses in recent years. Others argue the crisis should prompt a shift in priorities among large foundations, which still command billions of dollars in assets and are accorded nonprofit status in part because it is assumed that self-preservation is not their primary goal. "Large institutions have choices," says Rick Cohen, former head of the National Committee for Responsive Philanthropy. "Do they husband their resources for their own purposes, or do they say, 'At this time we are called on to do more'? As social institutions, aren't they obligated to step up to the plate?"

The travails of the nonprofit sector might also occasion some hard thinking about questions that were easy to put off when the inflated stock market caused the level of giving to swell. Do nonprofits use their resources as creatively and efficiently as they could? Do the needs of their clients always take precedence over less high-minded priorities (like burnishing their images)?

Most importantly, what can even a wealthy society like ours realistically expect of the nonprofit sector? Few politicians in recent years issued warnings about the danger of relying too much on private charities to help the poor - these charities were, after all, the widely heralded alternative to the welfare system, whose defects and perversities came to represent the evils of big government. We are now witnessing perversities of a different kind, as the number of Americans receiving cash assistance through what remains of the welfare system has fallen to a forty-year low despite spiraling unemployment. As David Jones, president of the Community Service Society of New York, a 160-year-old advocacy and direct-service organization for low-income residents, told me, "Responsibility for the poor was a government function in the Great Depression and Roosevelt's time. Now more and more people who lose their jobs turn to charity because we've off-loaded the responsibility to not-for-profits and made it so difficult and cumbersome for people to receive benefits." It's no sin for liberals to acknowledge that nonprofits sometimes do perform better than public agencies. It's also imperative to remind everyone that they are not a substitute for government, and that an equitable society should recognize their limits as well as their strengths.

This article was based on a cover story in the March 30, 2009 issue of The Nation.