First there was the subprime mess which collapsed the housing market. Then the independent mortgage companies collapsed and then came a credit freeze because the banks no longer functioned with all these bad loans weighing them down. They began to husband what resources they had left and this led to companies forced to cut back because they couldnt get normal operating flows due to the lending curbs. Then came the massive layoffs and a collapse in confidence that caused consumers and business alike to pull back on spending, buying or investing. This led to more misery and more cut backs, stock markets losses and more failures and foreclosures.
Welcome to what Federal Reserve chairman Ben Bernanke Tuesday described as the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing and how severe recessions become a gathering storm.
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