Why we need a recession -- soon

These hazardous ploys would be aimed at papering over the nation's debt problems until after the November 2008 election, after which nobody currently in power really cares what happens. If Democrats take over the White House, the Republicans will blame them for any economic calamities to come. If a Republican wins, he'll be happy to continue a long-standing tradition of allowing the nation to take some harsh medicine in the first year of his administration so he can take credit for fixing it in the three years hence -- just before the next election. It happened in 2001 and in 1991, and you can bet it will happen in 2009.

• Talk back: Are you worried that the nation is about to enter a recession?

Before this scenario can come to pass, it has one very high hurdle to overcome. Somehow, the big banks have to find a way to retain investors' confidence despite a January that is likely to feature many of the same problems we witnessed earlier this month. In early October, you may recall, institutions such as Wachovia (WB, news, msgs), Bank of America (BAC, news, msgs) and Merrill Lynch (MER, news, msgs) did an about-face from assertions that their businesses were not harmed by the credit crunch when they announced massive write-downs on asset-backed paper.

Investors will let them get away with that sort of rudeness only once. If the banks do it again -- after potentially being forced to take a lot of debt onto their balance sheets from failed "structured investment vehicles" -- shareholders are likely to slaughter the bank stocks, pushing them down at least another 20%.

Bove contends that for every $1 in uncollected debts that they have written off so far, the banks have uncovered another $2.50 from failed mortgages, auto loans and commercial lending. "Bad loans are going onto their balance sheet faster than they can write them off," he said.

Once investors determine that the banks' bad loans are out of control and that the risk cannot be adequately measured, they will sell first and ask questions later. So, we are about to enter even more interesting times. A debt-led recession punctuated with joblessness and foreclosure is almost certainly en route. The only questions are whether it comes early next year or in 2009, and how deep a hole we'll need to dig for the burial. Whatever the timing or depth, continue to avoid the bank and brokerage stocks.

Fine print

One of the first groups of companies to go in a recession: restaurants that serve the upper middle class. Recent victims include McCormick & Schmick's (MSSR, news, msgs) and P.F. Chang's China Bistro (PFCB, news, msgs). When McCormick reported a terrible September earlier this month, it blamed "a loss of aspirational customer visits." That's an amusing industry phrase meaning that people who were trying to show off by eating at a fancy restaurant but didn't spend a whole lot there are backing away from the table. A Cowen & Co. analyst said, "To us, this signals that practically all U.S. restaurant consumers are now acting in a unison recessionary mode. . . ."

• Video: Recession? Not yet, says MSN Money's Jim Jubak

To learn more about Punk Ziegel, visit the bank's Web site. . . . To learn how the government dates recessions, visit the National Bureau of Economic Research. . . . Strangely enough, some stocks tend to do fairly well in a recession, including real-estate investment trusts (REITs), insurance companies and, for some reason, containerboard makers. Also keep in mind that the best time to buy stocks for the long term is right smack in the middle of a recession, so you will want to start buying the banks and home builders once their currently hidden problems are more fully reflected in their stock prices. For more on the banks' issues, read my Sept. 14 column, "What the big banks aren't telling you -- yet."

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