Wednesday, January 23, 2008

Brace Yourself For Recession

I've been saying for a while now that this will be the worst recession we've had in my lifetime, and possibly since the Great Depression. Why? Because the economy (in particular, the housing market) was due to correct in 2001. We had a lot of choices after the attacks of 9/11 with how to stimulate the economy, and the Bush administration and "Easy Al" Greenspan made the wrong ones. Dropping the Fed Funds rate close to zero created a massive bubble in asset prices.

Now we're going to pay for it as 7 years of distorted economics get sorted out very, very painfully. Take a look at that chart above (found at the Wall Street Examiner). One of two things needs to happen to get back into the normal range: wage inflation, or home price deflation. Which do you think will happen first?

Bernanke seems to be following Easy Al's policy of dropping cash on the problems. Unfortunately, this time I don't think it will work . . . and we're turning the dollar into the peso.

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