Consumer/business credit is too expensive. Street-level interest rates are too high to stimulate any lasting demand (FICO 650 rate - Fed Funds rate = 5% +) The culprit here is banks recapitalizing from mortgage losses. How long until banks pass on low rates to consumers/business? Could be years, like Japan... Inflation is too high for recovery. Energy and commodities are extremely high despite recent pullback. Further, endless Bailouts of the Financial sector pass losses on to the Consumer via dollar devaluation = inflation. Current tab for Johnny Q at 1.5 Trillion. Price inflation destroys consumption. More money is spent to buy less goods. 75% of US GDP is consumption-based = GDP contraction. The Consumer itself, is tapped. Most have splurged their re-financed home loan on a dumping market or junk toys. Others, bought new homes at market top only to see collapsing prices destroy what little equity they had and ARM-resets make home ownership untenable = mounting walk-aways and foreclosures. Is there any help from rising Wages? No. Wages are stagnating. The economy is hurting for reasons stated above. Job losses are mounting and few sectors are aggressively hiring let alone giving raises. This points to further foreclosures = more CDO losses = more Bank losses/failures = longer and longer until banks pass on low rates to consumers and business = longer until recovery from cheap rates. Even when Merill and Washington Mutual go under - along with 100-1000 small US Banks - will that mean market bottom and a soon-to-be recovery? My 2 cents, no. Failed banks will not mean those left standing are in the clear. It just means more lenders, banks, funds have failed. All large banks will have to clear their balance sheets of CDO debt (who will buy it??), or raise enough capital to offset losses through share dilution or angel investors (who will buy it??), or continue the liquidity trap until they've got enough padding to warrant risk exploration, cheaper business loans, and easier lending standards on mortgages... The economies fate rests on the shoulders of the criminals that created this mess - the Banks. It really is prisoners dilemma. The Banks life-line is recapitalization from the spread. But that liquidity trap is killing the Golden Goose (read: economy), that could buoy their underwater investments and toxic real estate securities. Their options are limited. If they don't take the spread, tons could drop like flies as precious operating cash needed to offset CDO losses evaporate. So they take the spread and lobby for Government bailouts and backstops to save their own ass. The derivative situation just adds to the Mutual Assured Destruction to all this. Each bank, besides taking on huge Real Estates losses, also wrote insurance on corporate debt on companies who are NOW ACTUALLY GOING BANKRUPT! Whoops. Now, they're on the hook for Tens of Trillions in insured debt, if the Government or Industry Syndicates don't step-in and bailout the laggards (a la Bear and Lehman) to prevent their debt value from going to zero. Even if it means billion in losses for *each* Wallstreet firm, as we're seeing with Lehmans CDO's under a shotgun purchase by its competitors. 3 Billion loss per firm is better than Wallstreet going under entirely.... Very bleak. So whats needed for a recovery? 1) Demand Side - Weak banks need to fail. This will stop major inflation as FDIC and FED backstops cease. - Standing banks need to recapitalize. Once thats done, Fed rates get passed on to consumer/business credit and demand stimulation can happen. Until then, its 30% down and 9% for the average Joe. This is the kicker. Could take many years. We simply don't know how long its gonna take because level 3 and 4 crap is off book. Exposure level is undisclosed so figuring the length of recovery is still an unknown. 2) Supply Side - Inflation needs to stop to recapitalize the Consumers Wallet. That means constant dollar devaluation through endless Government backstops, bailouts and 1% Fed Funds need to stop. - Rates need to come up to reasonable levels after bank recapitalization or oils going to 200$.