Kass: Housing Red Ink Could Spell Recession

This column by Doug Kass appeared at 8:50 a.m. Wednesday on TheStreet.com's Street Insight.

My article Monday offered a sober view of the U.S. economy, documented the government's illusion of low inflation and healthy job growth, and discussed why stagflation will continue to serve as the functional equivalent of a huge tax increase on the middle class.

From my perch, the odds favoring a housing-induced recession are now increasing. My bearish preoccupation with the health of the housing markets appears to be justified by history.

The slow-motion drop in consumption seen in the last 12 months will likely accelerate, aided by growing evidence of a second housing downturn this year and possibly another downswing next year, which will be exacerbated by ever-increasing supplies of unsold homes served up, in part, by mortgage resets in 2007 and 2008.

The bullish crowd contends that there is no evidence that the real economy has been affected by the housing market and subprime collapse, rising energy prices or geopolitical threats. Nor -- according to them -- has the economy been affected by a host of other varied microeconomic and macroeconomic issues.

Today, the term liquidity is a catch-all phrase in support of continued economic growth and stock market appreciation, just at a time that collateral and interest rate terms in private-equity deals have begun to tighten.

The same things were said in the late 1980s.