The United States is in recession because financial institutions over extended themselves writing loans on overvalued properties to people that were not qualified to accept those loans and not capable of repaying them if the housing market dipped.   The housing market didn’t just dip, it nosedived, creating the new buzz word for the 21st century: “toxic assets.”

It is not really a secret that the economic growth from 2003-2006 was driven by consumer debt and debt spending.  Income was barely keeping up with inflation, which was actually an improvement over the quarter century average. The appreciation of housing values fed the monster that powered both the domestic and global economy giving Asia a place to sell everything it produced and the global financial network a home for its capital.

Now the cash cow is gone. The consumers still have their debt or they have a foreclosure and/or bankruptcy on their credit report.  Either way, the American consumers will not be the engine for the world economy for a long time to come.  Can anyone picture the American consumers going on a spending spree in 2009 or 2010?  The world depended upon growth in this segment, not just stability.  It makes up 71% of the U.S. GDP.  Even a significant housing recovery is not going fuel growth.  It will just stop the bleeding.

Equally troubling is the state of the financial sector debt which increased by nearly $5 trillion since 2004.  The financial sector has written off about $730 billion but still has at the very least $2 Trillion worth of debt to reduce before it can begin fueling anything.  Oddly, the only solutions at present appear to be designed to get the nation back to 2004.  In other words, get the consumers borrowing and spending again.

With the stock market decline a lot of money is sitting in the form of cash waiting for a time and place for reinvestment.  The problem is finding that place.  Is the world economy going to find another telecommunications or IT boom that drove the 1990s growth?  It is easy to talk about an economic recovery.  It is far more difficult to envision what is going to power that recovery.  The country starts producing in a recovery but what exactly is there to be produced and with what production infrastructure?  Flag waving optimism and faith in American enterprise is one thing but the reality of this economic situation is something else entirely.

Ultimately, it would seem there is only one potential blockbuster that prevent this recession from becoming an L Shaped recession (one that decline and then hovers for years at the depressed level). That potential is alternative energy.  An alternative fuel program on a scale that would decrease oil dependence by half would solve a myriad of the nations problems including its trade imbalance and many of the environmental issues.  It also has the potential for powering the economic rebound for years or even decades.  Unfortunately, the political obstacles are many, making a comprehensive program very unlikely with this Congressional makeup. Maybe ten years of stagnation will be enough incentive to stop talking and actually start doing something.