A textbook case of recession

Yes, Virginia, there is a recession. A recession is defined as two straight quarters of slowed growth as measured by GDP.

While the dictionary is out you might as well put a picture of the economy in Q4 of 2007 and Q1 of 2008 next to that definition.

This recession, which has already started, was brought on by a couple of factors. The main cause is tightness in credit markets caused by subprime losses at countless financial institutions.

Evidence of subprime losses is everywhere; even the conservative Swiss banker, UBS, has taken $15 billion in losses since October and there is another $30 billion on the books.

Bank of America had to close one of the world's biggest money market accounts (yes, that's right, not even a money market account is risk free). There is no liquidity in the credit market because banks are hoarding cash in fear of the day when they will have to realize the billions of subprime loans sitting harmlessly off balance sheets.

When banks do not lend to each other they do not lend to consumers, corporations or small businesses, which inevitably puts us into recession.

Closely associated with the credit tightness is the housing slump, and this, too, is contributing to the recession. Real estate prices are over inflated and the air is being let out of the bubble as values deflate.

This deflation of the largest consumer asset class (i.e., total real estate value exceeds total stock, bond or savings values) is hurting economic growth in three ways.

First, the slowdown in the housing market itself is hurting growth since six percent of the economy is the actual building and selling of houses.

Second, is known as the wealth effect - when consumers' net worth (home price for most) drop, they are less liberal with their spending.

Consumer spending accounts for 60 percent of our economy and a slowdown of any sort drastically impedes economic growth.

Last, housing prices deflated and left Adjustable Rate Mortgage borrowers with no equity to refinance, which led  to foreclosure for many. Foreclosures are to a large extent what has contributed to the aforementioned credit crunch. It should also be noted that credit card and auto loan defaults are climbing right along with foreclosures.

Some argue that recent economic data suggests the economy is doing better than thought and that I am just a Grinch. As Lee Corso would say, "Not so fast, my friend" - economic data is just like the Ghost of Christmas Past…it's in the past. Strong Q3 GDP and other recent data indicate what the economy was doing in July, August and September; not now or in the new year. Others point out that the government's Hope Now program and the freezing of some Adjustable Rate Mortgages will help stop the bleeding.

I spoke with Secretary of Treasury Paulson at a Treasury holiday party last week, and you get the distinct feeling that the plan's success will not live up to its expectations.

This recession will have a significant impact on Culpeper. Our great town has a lot of Adjustable Rate Mortgage exposure and, thus, a lot of foreclosures - not to mention real estate prices are deflating and vacancy is at high levels.

Many area employers' success is in manufacturing or tied to the housing market, and a recession will mean layoffs (i.e. Merillat).
I hate to be the Grinch this Christmas season, but frankly the economy is not looking good. There is even a chance of a relapse to Nixon-era stagflation if food and energy prices stay high.

Nonetheless, as any Great Depression survivor will tell you, the economy will rebound eventually. Ups and downs are the nature of life; cyclical economic movements are no different. My advice to you is to make sure your financial situation is set up so that a full-out recession will not leave you stranded.

Business columnist Worth Richardson can be reached at