Fedlstein on the recession

Martin Feldstein, President Emeritus of the National Bureau of Economic Research which among other things is responsible for dating the business cycle, opines on the imminent housing recession we (might) have before us. One choice quote is straight to the point and helpful, and comes right out of principles of macroeconomics (which means, in so many words, that I have the ability to understand it, since that's the extent of my knowledge of macroeconomics). He says:

The unprecedented national fall in house prices is reducing household wealth and therefore consumer spending. House prices are down 10% from the 2006 high and are likely to fall at least another 10%. Each 10% decline cuts household wealth by about $2 trillion, and this eventually reduces annual consumer spending by about $100 billion. No one can predict the extent to which the coming fall in house prices will lead to defaults and foreclosures, driving house prices and wealth down even further. Falling house prices also discourage home building, with housing starts down 38% over the past 12 months.

That's really the thing I've been worried about. The falling housing prices are worrisome because consumers spend out of permanent income, and primarily wealth, and that includes the value of their assets. The rising value of homes largely insulated the economy from a much worse recession in 2000/2001, because consumer spending never really took a bad hit. The decline in aggregate demand was mainly, from what I've read, among investment spending. But now consumer spending is falling because of falling housing prices, which is to say, household incomes are falling in a sense.

The range of predictions on how bad this will be goes from forecasts of small, but positive, growth rates in 2008 to grim forecasts of 6 or more quarter negative growth rates. If the latter happens, it'll be the worst recession in decades, easily - by a long mile. I hope not. Update: Forgot to post the link. Here 'tis.