The fact that the US is now in a recession is, at this point, without much doubt even if the consensus forecast � always behind the curve � now gives only even odds (49% according to the WSJ panel of forecasters, 50% according to the Bloomberg panel) to a recession outcome. The issue right now is not anymore whether the US will experience a soft landing or a hard landing but rather how hard the hard landing will be. The latest data point to a severe recession ahead lasting at least four quarters rather than mild recession that most forecasters are now predicting: a fall in employment in January; very high and elevated levels of initial and continued unemployment claims; a non-manufacturing ISM that literally plunged; falling � in real term � retail sales in the holiday season; mediocre results and falling sales for most retailers in January; plunging auto sales; very weak and further falling consumer confidence; a credit crunch that is becoming more severe in credit market as measured by a variety of credit spreads; the beginning of a severe recession in commercial real estate; a worsening housing recession; sharply falling home prices; evidence of a serious credit crunch in the banking system based on the Fed survey of loan officers; a correction in all major stock markets and the beginning of a bear market in the NASDAQ; serious evidence of a global economic slowdown, especially in Europe, with outright recession ahead in some European countries. All these indicators points towards a severe recession.
Believing � as the consensus now does � that this will be a mild two-quarter recession and that growth will recover in H2 of 2008 is wishful thinking. The last two recessions � in 1990-91 and 2001 � lasted almost three quarters (precisely 8 months) while the current recession looks fundamentally more severe than the latter two for three reasons: we are experiencing the worst housing recession ever in US history, a shopped-out, saving-less and debt-burdened consumer is now in financial trouble and retrenching; and we have a severe systemic financial crisis. Thus this recession will be longer, deeper and uglier than the previous two.
Since in the previous article I described a 12 steps scenarios towards a financial meltdown and a deep recession the crucial policy question is whether the Fed and other policy officials can prevent such a scenario of a systemic financial crisis.
I will present in this article the eight reasons why I am skeptical that such a systemic risk scenario can be avoided�
For quick history lesson - http://youtube.com/watch?v=HoptH8TqasE
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