The recession will continue to get worse for at least a year

The clearest proof that we are in a Recession has been the way the economy is shedding jobs at the rate of half a million a month. But that's a result, not a cause. There are a lot of causes, and they've built up over the last thirty years.

The causes of the recession include the reckless and incompetent banking out of the deregulated Wall Street, the extreme leverage that all of the investment banks adopted in the assumption that the market would always go up, and the sloppy risk management that ran all through Wall Street in the investment houses, from the large investors and funds and in the insurance companies. The utterly incompetent practices of the rating agencies pervade the entire mess, making an otherwise murky financial world totally opaque. But the core reason for the current recession is still the collapse of the housing bubble. That was the trigger that demonstrated that Wall Street's bankers were blindly and greedily working entirely to fill their own pockets and ignoring everyone else. The result is that right now no one in the big firms trusts anyone else to be able to pay back a loan. It doesn't matter what their financial condition looks like right now because the financial reports can't be trusted, and even if they could, the economy is still trending down and is very likely to provide more, mostly negative, surprises.

The short story is that the economy is not going to turn around until the housing market hits bottom and home values start to turn up. IN much of America that is not going to happen anytime soon, almost certainly not in 2009.

Kevin Drum looks at the reports that housing prices are still plunging, and compares the current value (See the Case-Shiller Index and also S&P/Case-Shiller Indices) to what it will be when the market has worked out the false value of homes caused by the housing bubble. Currently

...the Case-Shiller index is still only down to 158, and we've always known that it's not going to stop much before it gets into the 100-120 range. What's more, rapid declines aren't entirely bad news. We're probably better off getting to 100 sooner rather than later, since economic recovery almost certainly can't start until housing prices bottom out. (...)

Even at 2-3% per month, we've got at least another year before the housing market starts to reach its natural level. Until then, we're screwed.

No amount of "happy talk" by financial sales people, other bankers, politicians, or media financial figures is going to change that.

2009 is going to be a rough year financially.