Certainly interesting to read different viewpoints.
I have two friends in different parts of the banking industry. Both intelligent, conservative guys. One (who has a more domestic focus) believes that the recession will be mild, and that economic conditions in oz are a lot better than preceding the recession 'we had to have'. The other believes that we will be lucky not to have a full blown depression.
Generally, I have found that when economists agree on something, it is almost certain not to happen. With commentators generally agreeing that we will have a recession (either mild or severe), that can mean only: Stable conditions/growth or the biggest depression ever!
Seriously, some strange statements here so far:
KB, you state that people will stop buying what they want, and only buy what they need. What effect do you think that will have on the economy? You agree, elsewhere, that there will be a contraction- but it will be a gentle deflation of the bubble, and not a "bursting". After either event, how do you think asset prices will compare (to now)? How does that sit with other people's thoughts on valuation-to-earnings ratios?
OzBD. Banks in oz have to have cash backing for housing loans???? Nup. Asset backing is different to cash backing. Especially when the asset is the debt. There are also mortgage providers (rams, wizard etc) who began without even the facility to take deposits. Credit is CREATED by banks. If more people understood this, they may be more interested in nationalising the banks. It was certainly a revelation to me when I learned this principle.
IMHO unemployment is the big thing to watch. If (when) unemployment begins to rise, the real deflation of asset prices will begin. The pointers are there that this will happen (Kleinfeld {Rio Tinto} yesterday decribing falling commodities prices as due to softening in Chinese demand and not seeing their govt intervening to stimulate activity until mid 2009!!= end of mining boom), but data always lags the reality. People have to have lost their jobs before it appears as data. Just look around and ask people in business how they are going, how their forward bookings are, hiring/firing etc is the best guide. The signs are always there, as long as you know where/how to look. Great way to get the jump on people who are insulated from 'us in the trenches' (economists, govt officials etc). Local bank managers used to be great at having their finger on the pulse- they were accutely aware of how small businesses were going (cashflows, overdrawn/default days etc) before these things showed up as 'data'.
My sources say it isnt looking good.