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In August of '06 I guessed we would have a recession due to the housing bust starting in '07; I figured it would start about the middle of the year rather in Nov. or Dec., as it probably did. In any case, the situation has grown much worse since then. The banking system is in great trouble, the Federal government is more than $9 trillion in debt, many state governments are deep in debt, and many households are on the verge of bankruptcy.
Bernanke and the Fed have done what they can to help the banks and get credit flowing again, but nothing can really be done about the insolvency problem facing so many.
There are many households facing the pain of an adjustable rate mortgage with the interest rate about to adjust up; they simply don't have the income to make the increased payment. They probably don't have enough equity in their home to remove, even if they wanted. Regardless if they made an unwise purchase or were tricked into an ARM, many of
these homes will end in foreclosure. Other types of mortgages are also in increasing trouble, such as Alt-a, and many who took out home equity lines of credit may not be able to repay them. With so many homes in foreclosure, there won't be much of a need to build new homes, thus many jobs in the real estate and construction areas will be lost. As well, with home prices declining, many people will have their home value reappraised down, and this will result in much lost revenue for local governments.
Unfortunately, this is not the only debt problem many people have. They also have
high credit card balances, student loans, and car loans. Paying these off might have been
very difficult in the best of circumstances, but in a recession with stagnant or falling wages
and many thousands of jobs being lost, many people will not be able to, and in fact may
end up declaring bankruptcy. Adding to their woes is the problem of the falling dollar and
increased prices for certain goods.
Normally the Federal government would be expected to "ride to the rescue", but being
$9+ trillion in debt and digging a deeper hole every month, they may be increasingly limited
in what they can do. Foreign governments are increasingly wary about holding dollar-denominated assets, and if the Federal government spends too much on bailout programs,
foreigners may dump much of our debt, causing interest rates to skyrocket. This would
leave us in a near-impossible situation.
Since we are facing such a bad situation, our government may only have 2 real choices;
let the situation play out and face a massive and long lasting depression; or flood the economy with dollars and pay off our debts with a vastly devalued currency, risking hyperinflation.
