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Recession is a given. Can we avoid depression?

Economists wonder if the Bush administration is ideologically inclined to do what's needed to rescue economy.

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"Automatic recovery is in no way a reliable concept," he warns, especially if deflation (falling prices) has begun. He recalls warning of the economic damage that the bursting real estate and stock market bubbles would wreak in Japan: That nation suffered stagnation from 1990 to 2001. Today's financial crisis has revived the debate over the role of government in stopping a slump.

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If the economy doesn't improve soon, says Ed Yardeni, president of Yardeni Research in Great Neck, N.Y., the United States might want to consider doing what Sweden did in 1991: Inject government capital into a troubled financial market. The Swedish economy bounced back quickly.

"This is the worst credit crisis we have ever had" in the postwar US, Mr. Yardeni reckons. He praises the Fed for breaking historical precedents and being creative in its steps to prevent a credit meltdown. But actions by Treasury Secretary Henry Paulson to stem the troubles are "pretty lame," he holds.

So far, Yardeni expects only a "modest recession" in the US, with the "basic capitalism and materialistic instincts" of Americans coming back soon.

Economist Dean Baker figures that more of Wall Street's "big boys" – financial firms like Bear Stearns – will be pushed to the edge, "victims of excessive greed and really bad judgment." The co-director of the Center for Economic Policy and Research in Washington sees the financial system as biased toward pushing income to the already wealthy. So he wants any necessary federal intervention to keep troubled banks alive in a way that doesn't rescue managers or shareholders but merely keeps the institutions running under new management.

Economist A. Gary Shilling, like Parks, is also pessimistic. He predicts a 25 percent drop in house prices by 2010 from their 2005 peak. The result: All homeowners with mortgages will see, on average, nearly all their personal equity in their houses disappear – a $2 trillion drop in total wealth.

Mr. Shilling, a consulting economist in Springfield, N.J., also sees a major retrenchment in consumer spending. And he worries about a "wild card" – the financial crisis spreading as those in the investment community try to unwind their leveraged investments. Many hedge funds and investment banks have borrowed as much as 40 times their own capital to invest, seeking a high return.

Unlike Parks, Shilling expects a deep slump to urge Congress, regardless of party, to respond with rescue measures – say, Federal Housing Administration guarantees of mortgages and a moratorium on foreclosures. He's not sure if it will happen this year or wait for a new administration.

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