Financial Crisis

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“Lately I’ve been running on faith. What else can a poor boy do?”   Eric Clapton

Groucho Marx once said that he didn’t care to belong to a club that accepted people like him as members. As the recession ranks swell, truer words have never been spoken.

As early as a few weeks ago, politicians and economists stood on soapboxes assuring us the economic malaise was transitory. “I don’t think we’re headed to a recession,” offered President Bush, echoing recent sentiments by Ben Bernanke, the chairman of our Federal Reserve.

The conventional definition of recession requires back-to-back quarters of negative GDP growth and through that lens they might be right. We should remember, however, that we never entered a textbook recession at the turn of the century despite the S&P suffering an organic two-for-one split.

We’ve already entered a recession, one that’s been masked by the lower dollar and skewed by the spending habits of a slimming margin of society. To understand where we are and prepare us for what’s to come, it might be helpful to walk through how we got here.

Welcome to the Grand Illusion

There is a marked difference between economic growth and debt-induced demand. Instead of letting the market take its medicine and enter recession in 2001, the powers that be injected fiscal and monetary drugs to dull the pain and induce stock gains.

The Federal Reserve understands the market is the world's largest thermometer and the driver of a finance-based economy. On the back of the tech bubble, in the aftermath of 9/11, following the invasion of Iraq and into the election, they administered stimulants with hopes that a legitimate expansion would take root.

Is this a conspiracy theory from tin foil types sitting on a grassy knoll? The only difference between intervention and manipulation is communication, as we’re apt to say, a fine line that’s been all but erased in recent years. Hank Paulson recently highlighted The Working Group as a...