Perfect post Steve !

Gail I actually don't see this in the short term believe it or not I think we have a year or two where we deal with our current bogey men.

With this said I'd not be surprised to see Goldman Sachs take over a major bank my best guess is BofA. And I think this will the start of consolidation and break up of some banks.

This Stress test was a game and the Banks actually failed they declared themselves solvent and now the Government is in a position to start nationalizing "a few bad apples".

I think Citi will also be broken up before finally swallowed. The real winner banks GS and MS will slowly digest their kill.

But this won't be seen as a bad thing but a return to stability and the market will respond positively to this. And technically it is positive. Eliminating BofA will send a message that the US is cleaning up its house and you can trust it.

Beyond this we will simply be dealing with falling home values steady credit defaults and high unemployment. CRE will of course start failing in a big way but its more of the same.

In a weird kind of way our economy has already adjusted to this we have already absorbed most of the economic fallout. Not that there is not a lot more to absorb but by simply being more of the same it won't have a jarring economic effect.

Even if oil hits 150 or 200 people will think its just another temporary spike.

I believe we will sort of muddle through like this for 1-2 years. I think that the monetary inflation will send oil price to the 200 mark but I think that people initially won't care.

Now depending on when prices cross 150 a barrel to new highs at that point if they remain over 150 for a year then and only then will this muddle along situation start to break down.

We are in a lot of ways entering what you can think of as the python squeezing stage where the economy continues to function it just gets squeezed.

I think that bottom calling and green shoots will be present this year and next. Obviously companies that have cut to the bone and finally been forced to actually try and operate efficiently will probably be able to turn out small profits even with rising energy prices.

On this blog we often discuss the energy waste in the system but the structural waste in most companies is orders of magnitude worse. We have plenty of room to streamline business practices. Those that do will survive those that don't will die.

And of course we have at least 20 years of inflation induced equity gains in the housing market that can be rolled back.

So I just overall see this literally taking time to happen at at every step of the way from now on out people will be calling a bottom ever more stridently.

Now I think we will have more regional Detroits obviously most of the rest of the cities that are into auto manufacturing are joining Detroit in becoming dysfunctional. But these will be dismissed. I think for example Oregon will get hammered. But these will be seen as regional issues or industrial shifts not as the start of a widespread collapse. And I think we probably will see riots in at least one major US city over the next two years.

Not until 2011 will these regional collapses begin to spread and expand into social collapse.

I'm guessing that we will end 2009 with unemployment at 12% and oil over 100. 2010 will I think see oil go over 200 and unemployment inch up to 14% or even decline back to 10% but with more and more Americans taking any job they can get so underemployment will be huge.

Only in 2011 when the collapse of housing markets becomes effectively national and its obvious that things are getting worse will wide social disturbances become a problem.

Also I think that cities and states will hold out through most of 2009 and into 2010 before finally seriously cutting spending. The problem of course is its too little and to late and of course they will probably drastically cut police forces to scare the tax payers. Well this will begin to backfire in 2011 when cities find they are calling in the National Guard to deal with civil disturbances. And this scenario could easily take longer than this we could sort of stabilize in 2010-2011 and then finally fall apart in 2012-2013.

Its just going to take time for the structural failures to build up and finally collapse this is not a fast process. We still have a long way to fall before the system finally begins to break down for real. And I really don't see that the forces driving the situation are any different from today its just more of the same just a bit worse month by month and year by year.

And yes once oil prices are sky high for some time we will see energy conservation start and a belated attempt to deal with the energy crisis but all this will do is work to slow the collapse rate say for a year or two.

The problem is by the time we finally decide to change the social network will be to far gone to prevent widespread collapse. Still its simply going to take time. A lot has to happen and most of the forces are slow. Real Estate is intrinsically illiquid so it takes time to collapse. The continued support for the banking system will ensure it fails slowly.
Rising energy costs will be seen as temporary. Socially we will hold out for hope far longer than we should. But because the system will last longer than it probably technically should when it finally does crumble I think we will find that it had truly become a house of cards and topples easily.

So in a sense I disagree I think we can indeed extrapolate where we are today out for at least two if not four years. However in doing so it ensures that when what your saying finally does happen it will be decisive our creditors will not just turn away but flee.

In a sense you could even see that we are given one last chance to change. And I of course believe we simply won't but will try to get back the old ways and fail. So in this sense only after America's attempt at recovery has obviously failed will we finally see the current system break down. Until we have tried to recover and then failed the world will be willing to give us a chance.

I think the next two years will see on fake recovery after another and only near the end will the confidence really be lost.