On December 1, 2008, the National Bureau of Economic Research, the official arbiter of these things, announced what everyone already knew—the economy was in recession and the downturn had begun a year earlier in December 2007.

Every recession is unique and this one is no different. One of the unique features of the current downturn is its unusual trajectory. From December 2007 through August 2008, economic activity contracted at a fairly slow pace. And even this slow contraction was punctuated by a brief up tick in spending during the spring in response to the distribution of tax stimulus checks. During this period, the unemployment rate climbed slowly from 5.0% to 6.1%.

However, beginning in September, and especially after the failure of Lehman Brothers in the middle of that month, economic activity fell off a cliff. And the rate of decline in business activity accelerated through yearend. Between September and December, joblessness jumped from 6.1% to 7.2%.

The proximate cause of this economic downturn was the collapse in the housing market. With home prices falling, the value of mortgage-related securities plunged. Tumbling prices for hard-to-value mortgage-related securities threatened the liquidity and solvency of the many financial institutions that held these securities on their balance sheet.

However, this would not have been nearly as significant a problem if consumers and financial institutions had not gone on an unprecedented borrowing/lending binge at ever lower credit quality during the previous decade. This binge resulted in both households and financial institutions becoming greatly over-leveraged with a significant number of poor quality loans.

In addition to resolving the large number of bad loans outstanding, the deleveraging of the consumer and the financial system is likely to be a long, drawn-out affair. This suggests that the economy is likely to turn in a subpar performance for an extended number of years. Even when the economy returns to positive growth, it is likely to initially be a jobless recovery with the unemployment rate remaining high.

The current banking, credit, and financial crises are the worse that this country has experienced since the beginning of the Great Depression. However, this is not, nor will it become, another Great Depression. Nevertheless, the current recession will be the longest and deepest of the post-World War II period.

The economy’s performance in 2009 will depend importantly on how quickly and smoothly the banking and credit crises resolve themselves. It will also depend importantly on the timing, the size, and the composition of the economic stimulus program that the Obama administration will initiate.

This fiscal stimulus should provide a substantial offset to the declines in private sector spending that are presently occurring. Although this will not, by itself, immediately return the economy to a sustained economic expansion, it should help moderate the severity of the recession.

By almost any measure, housing is still the fundamental problem affecting the economy and the financial markets. Simply stated, too many housing units were built during the housing boom.

There appear to be approximately 3 million excess housing units. Annual absorption from a growing population is around 1 million units per year. However, more than 0.5 million new housing units are still being constructed. Thus, net absorption is only about 0.5 million units per year. At this rate, it would take nearly 6 years to work off all of the excess housing stock (assuming no further declines in housing construction).

As long as there is an excess stock of housing, home prices will continue to decline, although probably at a slower pace than what has been experienced so far. Nevertheless, as long as home prices are falling, the value of mortgage-related securities will be depressed, and financial institutions balance sheets will be stressed. Until the housing market is rationalized, it will be difficult for the economy to sustain a robust recovery.