From Brian Wesbury’s commentary today:

There is not enough room on page one of the nation’s newspapers for all of today’s news. Any of today’s stories – a Lehman bankruptcy, a sale of Merrill Lynch, AIG capital needs, plummeting oil prices, or new Fed lending facilities – could be above-the-fold headline news. The US is moving through its deepest set of financial market difficulties since the 1980s and 1990s, during the banking and S&L crisis.

The key thing to remember here is that the emphasis belongs on the word financial. These financial market problems are not a result of widespread economic weakness, otherwise known as a recession. In fact, real GDP has grown 2.2% in the past year and accelerated to a 3.3% annualized growth rate in the second quarter.

Of course, markets look forward so the fact that GDP has grown over the last year or last quarter is basically irrelevant, but Wesbury is right. This is a financial event, not necessarily an economic event. This de-leveraging is about correcting bad lending in the past and it needs to happen. But the sector most affected is the housing market, which is a relatively small part of the overall economy. I have maintained that we would not get a recession from the popping of the housing bubble for exactly that reason. If less than 5% of the economy blows up, will it cause a recession? The answer so far is no.

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