The Bottom Is Up Ahead

It means that the price of stocks, bonds, commodity futures and derivatives return to levels that reflect real cash flows and risk-adjusted economic values, not speculative values based on continued availability of cheap and easy money.

Such a broad reduction in wealth and living standards will take many forms. It will come in the form of higher unemployment and stagnant wages and falling income, which take statistical form in slower or even negative economic growth. It will come in the form of inflation and its first cousin, a lower value for the dollar. And it will manifest itself in lower values for pension funds, 401(k) accounts, university endowments and house prices.

You don't have to have a PhD in economics to see that this adjustment is underway. But it would be folly to assume that it is anywhere near completion. After all, it took many years for our collective standard of living to get out so far out of whack, and it's highly unlikely that we are somehow going to reverse things in a couple of quarters. And the bubbles in commodities and commercial real estate are still to pop.

Moreover, at every step along the way, households and companies, lenders and investors, politicians and taxpayers are going to look for ways to delay such painful adjustments or push them off on someone else. We all know that, just as things overshot on the way up, they are likely to overshoot on the way down.

There are no forecasting models I know of that can reliably predict how long all this will take. But simple logic, and our experience with the real estate debacle of the 1990s and the tech bubble of 2000, suggests that the turmoil in financial markets won't be over until the end of 2008, at the earliest. And since there is a lag of at least a year between what happens in financial markets and what happens in the economy, it's unlikely that the economy will bottom out much before the end of 2009. After that, look for another annoyingly slow and "jobless" recovery.

And that's the good scenario -- what happens if there are no nasty surprises.

What is important to keep in mind is that this will be a process of markets correcting for their own excesses and imbalances. Government can take modest steps to control the speed of the adjustment process or distribute the pain in different ways, but trying to prevent it will only make things worse.