The current euphoria in the stock market seems to be based on the perception that we have reached a turning point. I agree. We turn now from the relatively benign revelation of massive fraud in residential mortgage lending, whose impact has mostly been limited to the parties involved, to the main event, which is economic recession and depression.

The effect of the revealed fraud has been to put an end to the house price appreciation which was supporting growth in consumption. It seems that consumers have finally realized that the housing ATM is closed for the foreseeable future, and are adjusting their spending accordingly. It has taken much longer to get to this point of realization than I expected, but it seems clear that we have finally arrived.

In the recession, unemployment will rise and defaults will spread to the previously largely unaffected prime conforming mortgage base. As consumption slows, commercial real estate will be affected by the double whammy of negative absorption and substantial new supply coming to market. Corporate loans, in particular the private equity loans made with little or no margin for error, will begin to default. The financial system has been badly damaged by the fraud which it encouraged and sustained, and is not in a good position to deal with the recession and the consequent defaults. Mr Bernanke has exhausted most of his ammunition trying to stop the overture, without success, and will now become almost entirely irrelevant.

Bottom callers, it appears, believe that the size of the fraud problem is now becoming understood and therefore contained. They see a light at the end of the tunnel. Unfortunately, it is a train. The fraud problem is minor in comparison to the fundamental weakness of an economy built on credit and consumption rather than savings and investment.