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The tide of expert opinion on the state of the US economy has turned very rapidly, and the question of whether we have entered (or will soon enter) a recession is really only up for debate among shameless economic cheerleaders these days.

Ben Bernanke's speech yesterday, in which he urged Congress and the President to put together a short-term fiscal stimulus package - tax rebates to spur consumer spending - was just one more sign of this. Henry Paulson's recent comments on the dismal state of the economy also point to this growing consensus. These government officials are trying to steer people away from the word "recession," but in all likelihood they are understating the problems they see in the economy. If either of them had any good news to share, they would do so; if they could disguise the declining state of the economy, they probably would.

And from academic circles, Paul Krugman offers up a telling tidbit at the end of his column today, writing "I suspect that it’s already too late to prevent a recession."

Just two weeks ago, Krugman spoke on a panel at the annual conference of the American Economists' Association. The New York Sun described his outlook in an article on the event:

On Tuesday, Martin Luther King, Jr.'s birthday, United for a Fair Economy released a report called "Foreclosed: State of the Dream 2008," which catalogues the losses suffered by communities of color due to the subprime lending crisis. From the executive summary:

More important than all of these consequences is the targeting of people of color and poor people as the best candidates to sign up for one of these loans. In the hands of the mortgage lending industry, subprime loans became predatory loans—a faulty product that was ruthlessly hawked even though financial institutions were aware of its defects. Even a surface check of the demographics shows that, in city after city, a solid majority of subprime loan recipients were people of color.

Hungry for new and different products, the financial services industry added features to these loans—exploding adjustable rates, balloon payments, penalties for early re-payment—that hobbled their recipients financially and made it unlikely that they would be able, after a brief honeymoon period, to repay the loans at all.

A deeper look into the crisis reveals that the subprime lending debacle has caused the greatest loss of wealth to people of color in modern US history.

On Monday, Representative Henry Waxman asked the CEOs of Merrill Lynch, Citigroup, and Countrywide to testify before the House Committee on Oversight and Government Reform (which he chairs) on the size of their severance packages and how this aligns with the interests of shareholders, given problems of a historic magnitude at each of these entities.

Waxman's request hasn't gotten a ton of coverage, but today there is an article in the WSJ on compensation structures in the mortgage finance industry, "Deal Fees Under Fire Amid Mortgage Crisis," that uses it as a hook (the link takes you to Google News - you have to go there to get access to the Journal, I guess). The article offers a decent rundown of the skewed incentives in the world of mortgage finance, from broker on up to bank CEO:

Upfront commissions and fees are well established on Wall Street. Investment banks get paid when billion-dollar mergers are inked. Firms that create complex new securities are paid a percentage off the top. Rating services assess the risk of a new bond in return for fees on the front end.

Until very recently, there was debate among financiers and economists about whether the US economy was decoupling from the world economy, with some taking the position that a slowdown or worse in US economic growth would not substantially hinder global growth now that rising powers like China and the EU were taking over (that is, the world economy would "decouple" from the US economy).

The people who made this argument aren't looking very smart right now, and as I browse Google News I stand reminded of this. Here are some of the headlines:

The USA Today editorial page has some harsh words for Wall Street today:

Frankly, the Fed's behavior is far less a problem than Wall Street's. In the past decade alone, a rotating cast of institutions has assisted Enron and others in hiding their fraudulent accounting, issued bogus "buy" recommendations on companies that happened to be lucrative banking clients, and papered the world with toxic debt. Call it the P.T. Barnum school of business: "There's a sucker born every minute."

Or to play on an old brokerage ad: When Wall Street talks, don't listen.

The newspaper was responding to calls from Wall Street and some economists for the Fed to cut rates faster (this, according to Nouriel Roubini, is less a government bailout than necessary medicine for an economy in dire straits).

The newspaper echoes Paul Krugman in a talk to Google employees last month, in which he summons P.T. Barnum in his discussion of high finance, and says of Wall Street's system of financial wizardry "I don't know why it persists" and "I don't know how it all ends."

The Wall Street Journal reports on how each candidate is responding to the mortgage mess, and Obama comes out looking pretty bad compared to both Clinton and Edwards.

Housing Crisis Looms Larger in Campaign
By ALEX FRANGOS
January 11, 2008; Page A6

...

But the plans from Democrats contain some differences, which could become accentuated in Nevada, and later, in big states such as California. Both Mrs. Clinton and John Edwards have said that if the mortgage industry doesn't voluntarily agree to enlarge and lengthen the terms of a plan backed by Treasury Secretary Henry Paulson and agree to a foreclosure moratorium, they would force the lenders to do so through legislation.

Barack Obama opposes making laws to force such moves. An Obama adviser says that a mandatory moratorium and rate freeze - which could force lenders to hold loan interest rates below market levels - could deter them from re-entering the market and would delay the return of liquidity.