I Am Very Tall

Ok, this should be my last post for today, promise. I've been talking to Pudge about whether or not we think a recession is here/on the horizon. From what I've read, it's here and it's going to be long, big and nasty. Read that as: If you've got a job, try your best not to get fired.

From what she's read, it might be here, but even if it is, it probably won't last that long. Her view is that while the American consumer will probably be hard hit, a significant portion of the American economy has achieved enough global exposure to absorb the adverse effects. At least, I think that's what she said; if I'm wrong, she can always add a comment and correct me.

Anyway, just to add some fuel to the fire, here are a few select comments from the esteemed Marty Feldstein, whom some of you Harvard types might remember as being one of the inspirations for Mr. Burns (italics are mine):

Although it is too soon to tell whether the United States has entered a recession, there is mounting evidence that a recession has in fact begun. Key measures of economic activity stopped growing in December and January or actually began to decline. The collapse of house prices and the crisis in the credit markets continue to depress the real economy...

If a recession does occur, it could last longer and be more painful than the past several downturns because of differences in its origin and character. The recessions that began in 1991 and 2001 lasted only eight months from the start of the downturn until the beginning of the recovery. Even the deeper recession of 1981 lasted only 16 months.

But these past recessions were caused by deliberate Federal Reserve policy aimed at reversing a rise in inflation. In those cases, the Fed increased real interest rates until it saw the economic slowdown that it thought would move us back toward price stability. It then reversed course, reducing interest rates and bringing the recession to an end.

In contrast, the real interest rate in 2006 and 2007 stayed at a relatively low level of less than 3%. A key cause of the present slowdown and potential recession was not a tightening of monetary policy but the bursting of the house-price bubble after six years of exceptionally rapid house-price increases. The Fed therefore will not be able to end the recession as it did previous ones by turning off a tight monetary policy.

Here's a quick bullet point summary of the rest of the article:

* Fall in national housing prices is unprecedented, depressing wealth and consumer spending
* Biggest problem is the paralysis of/lack of confidence in the credit markets
* No one has any idea how much their credit instruments are now worth, which is preventing anyone from buying anything
* Unfortunately, the only way we know how to establish market value for these instruments is by seeing how much other participants are paying for them
* No one has any idea how to fix any of this

For those of you that have any interest in this kind of thing, I'd recommend reading Feldstein's article. Similar to the subprime primer that I linked to the other day, it also provides a crystal clear view of the situation at hand, albeit with fewer stick figures.

Link via the Big Picture