This is the verdict of Wall Street today. Not that we're necessarily going into recession. In fact, the indicators still point to what I think is less than 50% probability of recesison. There is GDP growth, employment numbers and trade balance, which all point to economic expansion, and then there is some serious but fixable trouble in the financial sector. Which of these factors is more important is uncertain. At the current stage, banking problems have more to do with perception of risk that with real losses. The vast majority of mortgages are still being paid on time, the vast majority of collaterals is still providing an adequate compensation for the risk, and even subprime paper is more valuable than panic-striken people imagine. That being said, the risk is far from negligible, not because the adverse outcome is too likely, but because the bets are too high. The simple reason is that the US economy IS the financial sector. Yes, it may not be so obvious from official statistics, which says that outside financial services, America also produces other valuable services, and even some tangible things like minerals, weapons, and a smidgeon of industrial goods, but for all that, the financial industry is the flagship that's heavy enough to pull the smaller boats underwater if it goes down. I'll be even more blunt: if several big banks file Chapter 11, then we are not going into recession because we are going into a depression. I don't see it happening, unless house values drop 10%. I don't think we're anywhere near that (at least here in New York prices are growing faster than they did in 2005, and similarly in all other cities I can think of except maybe Detroit, I only wonder where the NAR takes its numbers from). We need a mortgage rate hike to something like 7% to make it happen, and there is little chance of that, unless the Chinese stop buying our mortgage paper. That would be an intriguing possibility. Other than that, Bernanke should have no difficulty bailing out the troubled banks with tons of newly-made greenish bathroom tissue. Unless I am underestimating the stupidity of our govenment and they somehow manage to mismanage it. But two things are clear. Number one, the market will be going nuts for several more months in any case. And number two, whether or not the bank rescue effort is successful, it is the depositiors who will pay for it. The bankers don't want to pay.