People are beginning to talk about recession, but no one's talking about depression, except a few; news sources and "responsible" commentators consider them un-mannerly, or mad. That doesn't mean they're wrong, only that what they're saying is not something people want to hear.
Consider the immensity of the sub-prime mess. It began as a scheme by banks to expand the mortgage market; traditional mortgages weren't growing fast enough, nor producing the profits they wanted.
So, banks began lending to people with lower incomes and more unstable livelihoods. Since their credit rankings were terrible, these people (a large portion were minorities) were charged more than someone with more money. Many minority borrowers merited conventional mortgages, but were steered towards the more expensive sub-primes, as well. In order to sell these, banks found all sorts of creative ways to conceal what the borrower would really pay until after the bank had sold the "asset" (the mortgage) to the first of many buyers in an increasingly complicated resale market.
The resale market drew in investors from LA to Scotland to Singapore to Tokyo.
Why could this be a depression, or more than a recession?
The world economy until now was in a period of huge growth, but most of the proceeds went to a small elite. The US middle class financed the growth through high personal indebtedness. In addition, in the US, growth has been bought by continuous deficit spending for wars, and Republican unwillingness to pay for them. How much more "economic stimulus" will the economy need above the chronic budget deficits of almost $300 billion a year?
The global market is huge now. In the 1930's the US was comparatively self-sufficient, not only in oil, but in manufactured goods and food; it exported goods and food. Now, the US accumulates debt for two of the three. Even most made-in-America products have large amounts of foreign components. Even services are imported. US debt overtops debts held by almost all other nations combined.
When the Fed lowers interest rates, it not only reduces the costs of mortgages and other loans, thereby stimulating the domestic economy, it also raises the costs of imports since interest rate cuts make the dollar less attractive abroad (dollar funds will pay less).
In theory, a cheaper dollar should mean the US can export more and import less, but not if a large proportion of imports are fixed into the structure of doing business: importing raw materials, parts, outsourcing and offshoring, that's how transnational corporations work. It will take them years to shift their supply chains, so, in the meantime, US debt abroad will grow even larger, and higher prices for foreign goods will cause it to grow faster.
The subprime crisis is only a trigger; the growing world economy has become more unstable because of the unequal distribution of proceeds: if people aren't paid well, the US mass market becomes unaffordable; people can't go deeper into debt ad infinitum, especially when their houses lose value--they can no longer borrow against them.
Our economy depends upon the unsustainable: massive imports, for which we pay (on net) with further debt. Some of that debt--the funds based on the subprime mortgages--may never be repaid. How eager will foreigners be to lend more money to the US?
It all comes of allowing banks to trade in financial markets without restrictions: banks are not conservative when it comes to earning more money in the short term; they will use any leverage they have, including the cash they can generate from selling lousy mortgages, and any new paper money they can create through inventive financial manipulation. Hence the "bubbles:" dot.com, stocks and now housing. Banks are not able to regulate themselves.
The US needs to remember the lessons it learned in the Great Depression: banking and business, generally, must be re-regulated, investors must be restrained, people have to be paid generous wages, taxes must be raised on the "have-mores" and lowered on those who have less: inequality must be reduced.
The global impact of the bursting US housing bubble demonstrates what I have written about in The Selfish Class (available at http:www.roman-empire-america-now.com/e-books.html). When the wealthy are in control, the whole society suffers: the late Roman Empire was a particularly egregious example: it fell because the selfish class, the Senators, cornered all the wealth, and ultimately refused to use it even when the survival of their empire was at stake.
The basis for a stable economy is a more equitable distribution of its wealth. Then the American mass market can be re-energized; it appears to be the engine behind global growth. Tax rebates, extended unemployment benefits and social security bonuses are only temporary stopgaps. Tax cuts to businesses, and making the Bush tax cuts permanent would only increase inequality; it would not re-establish the American mass market. Economically, US policy has to go in the opposite direction.
The very structure of the economy has to change.