The U is for You.

Now that Wall Street and the Federal Reserve have finished congratulating themselves for not having been alarmists–in other words, for failing to recognize that a recession was looming–they are now facing up to the onset of a U.S. recession and a rapidly spreading financial crisis. Having been late to reach that conclusion, they now grudgingly admit that we may have a brief “V-shaped” recession and are apparently hoping that Fed rate cuts and a fiscal stimulus package will quickly solve the economy’s problems.

The more likely situation, however, is that the recession of 2008 will be a longer, “U-shaped” affair, driven by an unusual, persistent drop in consumption and investment. Underlying the intensity and persistence of the cyclical weakness emerging in the U.S. economy and manifest in weaker investment and consumption spending is an “endogenous” risk appetite cycle, one that is tied to the fundamental problem facing the U.S. economy: the build-up and subsequent implosion of the housing bubble.

See also, Housing Meltdown: Why home prices could drop 25% more on average before the market finally hits bottom, from a recent issue of Business Week. The full text spends a lot of time hedging, taking a he-said, she-said approach to coverage so as to avoid being called out as 'wrong' down the road. Still, the simple act of repeating the 25% figure lends more credence to it.

The Risk Cycle