In December 2005, despite obvious indications that the US housing market was overheating, housebuilders in that
country ramped up the number of units they were producing dramatically. They did so in the face of a wall of institutional money looking for high returns and keen to invest in anything that seemed asset-backed.

In retrospect, although no single factor can be identified as the main cause of the worldwide economic slowdown, the secondary US housing boom can be seen as a start; a tipping point which led to the questioning of previous assumptions about the long-term investment value of bricks and mortar.

Yet the collapse of a housing bubble in itself should not have started shockwaves of the type that are now being seen. The effects of the end of the dotcom boom were broadly confined to technology companies and investment firms – there was little of the creep into the general economy that is being seen in the housing market collapse.

There are signs, in the US at least, that the damage is a consequence not of an asset class declining in value, but the reaction to a sustained and deliberate "defrauding" of investors around the world.

Bubble rap: like exploding Hubba Bubba, the pricking of the house price bubble has gummed up global finance

The fuel was cheap money. With vast amounts of cash available worldwide to invest, and with ever-higher returns being demanded, the market did what it always does in such circumstances – it cheated itself.

And on a vast scale – perhaps in as many as half of all home sales in the US those involved in the chain simply lied to themselves in the chase for rateof- return.

What happen, as is now becoming clear, is that mortgage advisors would target sub-prime individuals, seeking to persuade them not only to buy homes but to take additional loans to cover fit-outs and extensions. They would then secure the money from the mortgage lenders simply by inflating the "value" of the house to whatever it needed to be.

The mortgage lenders themselves, and this is also true in the UK, went along with this as they had discovered a new mechanism which seemed to offer a completely risk free way of lending – securitisation: essentially bundling lots of mortgages together and selling them on to other investors.

This investment mechanism itself was not the problem. The problem was that the purchasers of such securities were completely unaware that a large proportion of the assets they were holding, perhaps as much as 25 per cent by value, essentially consisted of second hand fridges, washing machines, plasma TVs and memories of very nice holidays.

Spare a shekel for a poor ex-banker?

Those who invested in this sub-prime market have been heavily criticised but, in reality, buying securitised investments seemed a sensible balance of risk. Housing values had been rising for a decade and mortgage lenders – with one or two exceptions – were not known for simply throwing money at people.

Michael Thiemann, chief investment officer at Collineo Asset Management, a German firm that invests on behalf of
European banks and insurance companies, explained it thus: "You have no time to look really deeply at every single borrower. You're looking at statistical distributions."

What he didn't add is that you are also trusting that all the way down the chain a $200,000 loan had been given against a property that was worth at least that. The wave of repossessions that started when US interest rates rose simply brought the endemic over-valuations by virtually everyone to the fore.

The knock-on effect around the world was simply down to the fact that so many institutions had sold or traded these securities that it was impossible to find a single bank that had not inadvertently cheated another. Trust dried up overnight, and with it arrived the credit crunch.

The US might still survive the worst consequences of the freeze in liquidity, but the UK will not. UK problems such as an over-borrowed population, an uncompetitive workforce, a profligate government and an overvalued (until recently) currency have joined with global phenomena such as high energy prices and a commodities bubble to make recession inevitable.

The consensus amongst economists is that the UK now stands a far greater chance of sliding into recession than the
US. The OECD now predicts that the UK alone of all the western nations will suffer a recession.

There have been five postwar recession years in the UK: 1974, 1975, 1980, 1981 and 1991. The most severe was 1980 when, according to the Office of National Statistics, annual GDP fell by 2.5 per cent.

It can be argued (and has been) that the statistical definition of a recession – negative growth for two quarters – is nonsensical and it should in fact be defined by the rate at which economic growth slows. An economy growing at five per cent which slows to zero per cent would not technically be in a recession but it would feel like a depression.

The US National Bureau of Economic Research (NBER), a non-profit group that aims to promote a better understanding of how the economy works, defines a recession as "a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy".

On that basis the UK economy is already in recession and has been for nine months. The question businesses need answering is: how long will it last?

In the last recession, in 1991, the economy contracted in three consecutive quarters and annual GDP fell 1.4 per cent compared with the year before. In 1990, the economy retreated in the final two quarters but its growth in the earlier part of the year was enough to ensure expansion for the year as a whole.

In practical terms, however, the 1990s recession lasted two years from mid 1990 to mid 1992. This is around the standard length for recessions judged solely on GDP decline. This would suggest that if, as is anticipated, GDP moves into negative territory by the next quarter, an average recession would see the economy move back to growth by quarter 3, 2009. Again, in practical terms the recession would then have lasted from mid-2008 to mid 2010.

The effects of recession are never spread evenly throughout the economy. Some sectors will go through this recession virtually untouched while others, notably anything to do with housing and high-value retailing, will find it horrendous.

As the old economists' joke goes: "What's the difference between a recession and a depression? A recession is when your neighbour loses their job; a depression is when you lose yours."

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