It would be tempting to blame Ben Bernanke's bleak assessment of the current economic situation in a speech in Austin, Texas on Monday for yet another debilitating market swoon -- the Dow closed down 679.95 points -- but it would also be unfair, even if the most precipitous portion of the plummet came after he finished speaking. As I noted earlier today, there are plenty of good solid reasons for investor despair right now, and we don't need downbeat pronouncements from the Fed Chair to make us feel any gloomier. Sorry to say, but a 680 point drop in the Dow is a quite rational response to the current crisis.

Nonetheless, there was an interesting tidbit in Bernanke's speech that could inspire despair in a segment of the population that probably overlaps quite neatly with fat cat investors: The beleaguered acolytes of Milton Friedman.

On Saturday, Paul Krugman noted that Friedman's greatest contribution to the economic corpus, "A Monetary History of the United States," co-written with his wife, Anna Schwartz, argued that the Great Depression could have been averted if the Federal Reserve had moved more quickly to expand "the monetary base," (which Krugman defines as currency plus bank reserves.) But Krugman observes that in this crisis, the Fed has been "spectacularly aggressive" in expanding the monetary base and so far, "it doesn't seem to be working."

"I think the thesis of the Monetary History has just taken a hit," writes Krugman.

In Bernanke's speech on Monday, the Fed Chairman talked about the speed with which the Fed had lowered interest rates.

By way of historical comparison, this policy response stands out as exceptionally rapid and proactive. In taking these actions, we aimed not only to cushion the direct effects of the financial turbulence on the economy, but also to reduce the risk of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, leads to further economic damage. Unfortunately, despite the support provided by monetary policy, the intensification of the financial turbulence this fall has led to a further deterioration in the economic outlook.

In other words, despite being "exceptionally rapid and proactive," the Fed's effort doesn't seem to be working.

Expanding the monetary base and lowering interest rates aren't exactly the same thing, but they are both monetary policy tools employed to goose an economy into expansionary action. So the lesson to be drawn from their simultaneous failure is identical. Monetary policy alone will not get the U.S. back on the right economic track. Massive government spending is back in fashion, as are the theories of John Maynard Keynes, whose star went into eclipse as Friedman's ascended ever higher.

And that's a topic we will be returning to in considerably more detail as the weeks go by.

Tell us something we didn't know. The National Bureau of Economic Research, the organization that "officially" decides when recessions begin and end, has finally declared what most of us have suspected for quite some time. The United States economy is experiencing a recession.

What may surprise some people is NBER's announcement that the recession started way back in December 2007. How can that be? In the second quarter of 2008, the economy grew at a rate of 2.8 percent. We still haven't experienced two consecutive quarters of negative GDP growth, which most people believe is the quantitative measure that defines a recession.

But most people are wrong. As the NBER notes in its statement, "A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion." Using a variety of criteria, the NBER has now decided that the peak occurred in December 2007.

As for the trough? Your guess is as good as the NBER's. They don't do forecasts. And we're not there yet.

But here's the fun part. Although I did my best do ignore economic news last week, it was impossible to avoid the showdown between Amity Shlaes and Paul Krugman over whether FDR made the Great Depression worse, or led us out of the morass with the New Deal. I'll dig into that ever popular parlor game between left and right economists later this week. But meanwhile, Barry Ritholtz reminds at the Big Picture that back in July, Amity Shlaes defended Phil Gramm's "nation of whiners" comment by arguing that the former senator was correct to say that Americans were only experiencing a "mental recession." Her reasoning was that since the U.S. hadn't experienced two consecutive quarters of negative GDP growth, the U.S. wasn't actually in recession.

Most of us who were paying real attention to the economy this summer thought such a line of argument was silly. One can even argue that Barack Obama was elected president of the United States in large part because it was clear that McCain and his advisors were willfully ignoring just how big a ditch the economy was driving into. But the footnote to today's NBER announcement is that we can now definitively say that Shlaes was wrong, back in July. Her understanding of current economic affairs proved embarrassingly limited.

And this is a person we're supposed to take seriously as she attempts to rewrite the history of the 1930s?

October continues to solidify its reputation as the month the U.S. economy dropped dead in its tracks. On Monday, the Commerce Department reported that construction spending declined by 1.2 percent in October. (The Associated Press describes the drop as "larger-than-expected" -- a formulation that is beginning to sound a little silly when applied to economic data from October.)

Let's see, what else happened in October? Manufacturing activity fell to a 26-year low, sales of new homes dropped by 5.3 percent, sales of existing homes dropped by 3.1 percent, residential housing construction fell by 3.5 percent, and non-residential construction dropped by .7 percent. Moral of the story? The housing sector has yet to reach rock-bottom.

And in an entirely related piece of news, the Dow Jones Industrial Average had fallen 377 points by 11:45 EST. Call it "rational non-exuberance." The more data we get, the more clear it is just how far off the rails the U.S. economy went in October.

From the AP:

[Economists] believe the country has slipped into what could be the worst recession since the 1981-82 downturn. The current economic slump is being worsened by the most serious financial crisis to hit the country since the 1930s as banks struggle to deal with billions of dollars of loan losses, beginning with troubles with mortgage debt that reflect a record level of foreclosures.

There was some kerfuffle in the econo-blogosphere last week over whether Barack Obama had appointed too many economists as advisors. Personally, I think the new president is going to need every last one of them.

I apologize for abandoning my post while titans like Citigroup totter and Barack Obama rolls out his new economic team, but I'm huddling with family this week. I'll be back on Monday.

Reuters/Larry Downing

New York Federal Reserve president Timothy Geithner testifies at the U.S. House Financial Services Committee about financial market regulatory restructuring in Washington July 24, 2008.

Jim Cramer will be devastated, the Lawrence Summers-hating left will be relieved, and How the World Works is flat out delighted: NBC News and the Wall Street Journal are reporting that Barack Obama's pick for Treasury secretary will be New York Federal Reserve Bank president Timothy Geithner.

My reason is simple: Back in 2006, while most of the financial establishment was pooh-poohing the possibility that the global economy was at any risk from a systemic shock, Geithner was actively warning that unregulated derivatives posed a threat to financial market stability.

Here's what I wrote in September 2006, after mulling over a speech he gave in New York that attracted a fair amount of attention in the blogosphere:

For the most part, as is typical of central bankers, Geithner stakes out a careful, cautious stance that treads familiar ground: the difficulty of striking the right balance between regulatory supervision and unfettered market efficiency. But his caution surrounds a dangerous core: Geithner acknowledges that the explosion, over the past 10 years, of hedge fund trading in exotic financial instruments may well have contributed to the general resilience that the U.S. (and global) financial system has demonstrated in response to external shocks since the Asian financial crisis of the late '90s. And yet he surmises at the same time that the very flexibility of the current system may actually make it more vulnerable to a really, really big shock.

Financial panics start when traders and bankers who call in loans or sell off their holdings at the first sign of trouble set off a cascading effect in which everybody else follows their example and the system implodes under the strain. Paradoxically, Geithner appeared to be saying, the more flexible the system, the more quickly such a cascade could happen, and the harder it could be to stop.

"The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by and complicate the management of very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones."

That's a subtle argument, and we're not going to know whether it holds water until the flood is already 5 feet high and rising. Naturally, given my own fixations, the first thing that came to my mind was yesterday's editorial in the New York Times worrying about the proliferation of mortgage-backed securities, and wondering what would be the consequences of all the current musical-chairs-like trading in mortgage risk in the event of a prolonged housing bust. Will that be the backbreaker?

As we are all too well aware now, the proliferation of mortgage-backed securities and their derivatives did indeed break the back of the global financial system. Before the storm fully broke, Geithner made heroic efforts to get Wall Street's biggest financial institutions to voluntarily come together to rein in the wild west world of credit swaps. But without the active support of the White House or a succession of Bush administration Treasury secretaries, he was just one man attempting to bring order to an entire territory of outlaws.

Now he gets a chance to be the top sheriff, with the full backing of an administration determined to find a new balance between regulatory supervision and market freedom. It's a smart pick.

And while it's always foolish to read too much into any particular swing of the Dow Jones Industrial Average -- there's no ignoring Friday's late afternoon skyrocket: The Dow jumped 494 points.

Whether we should be happy that Wall Street is happy is, of course, a valid question.

I remarked to my 14-year-old daughter this morning that after the 10 percent decline in the Dow Jones Industrial Average over the last two days, stock prices have dropped back to around where they were when I started putting money into college funds for her and her younger brother back in 1997. She winced. As did I when I saw a story in the Financial Times this morning reporting that hedge fund investors had withdrawn $40 billion worth of their investments in October, and even bigger numbers were expected for November and December. Redemptions on such a scale force hedge fund managers to sell their holdings whether they want to or not, inevitably putting ever more downward pressure on stocks. Where will it end?

The question poses its own answer. It has to end at some point, doesn't it? There is only so much that can be redeemed. According to the FT, some hedge funds are now sitting on huge piles of cash. Naked Capitalism's Yves Smith sees this as a hopeful sign: "One bit of good news: enough funds are [so] heavily in cash in anticipation of these investor demands that observers believe that markets will suffer considerably less from forced selling."

If you think of hedge fund deleveraging as a huge sucking force dragging down the market, then you also have to imagine that at some point, that suction will come to an end. Once the wary and fearful have redeemed all their investments, there should be bargains galore. Long before the recession ends, the stock market will likely spring back.

In another rare outburst of optimism, Felix Salmon argues this morning that the current phase of the crisis is not a full-blown financial meltdown. He cites the relative stability in one key measurement of credit tightness -- the TED spread.

The TED spread today is 213bp -- more or less exactly where it's been for the past few weeks. Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman's collapse. Rather, it's an old-fashioned economic crisis, which severely erodes the equity of leveraged banks, but where money still flows and even the occasional IPO can get away if it's priced at a discount. Or, to put it another way: it's a bear market, not a financial meltdown. Which might be little solace to anybody whose stocks have been crushed of late, but which might help reassure policymakers at least a little.

You know times are tough when you are relieved to learn that we are only experiencing one of the worst bear markets since the Great Depression, and not an unthinkable meltdown certain to destroy civilization as we know it. Now that that's settled, I can go on to worry about other things, such as the fact that unemployment in California jumped a full half a point in October, up to 8.2 percent. That's the highest its been out here since 1994.

The perils of Citigroup, an "icon of capitalism," according to the Wall Street Journal.

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, according to people familiar with the matter.

A little over two months ago, when investment banks started to drop like flies, there was a rousing debate in the blogosphere on the question of how much of our current woes could be traced back to the repeal of the 1930s-era Glass-Steagall Act by the Gramm-Leach-Bliley Act of 1999. A number of respected economic voices, including Tyler Cowen, Bradford DeLong, and Justin Fox, made the provocative case that we should be thankful for the repeal of Glass-Steagall's separation of commercial banks and investment banks, because at that time, the big commercial banks, including Citigroup, JPMorgan Chase, and Bank of America, seemed relatively immune to the credit crunch. Who else would have had the capacity to swallow up Merrill Lynch and Bear Stearns, if not for these liberated giants?

I think that this thesis has taken a bit of a hit in recent days. Citigroup appears to be in big trouble, and JPMorgan Chase and Bank of America both experienced debilitating stock slides on Friday, potentially also putting them in some jeopardy. If there is a lesson to be learned right now, it might be that big is not necessarily better. If you're too big, you can't be allowed to fail, and if you're really, really big, like Citigroup, there is a very limited pool of possible rescuers.

As in, in the case of Citigroup, a pool of one. Now Brad DeLong says it is "Time for the Government to Buy Citigroup."

The price of a barrel of oil dropped under $50 dollars on Thursday. Good news for automobile drivers and stressed out airlines, perhaps, but very bad news for some countries for whom oil production is the economic mainstay. For example:

Russia.

The Guardian reports:

The oil slump, however, exacerbates Russia's already severe economic problems. Since May Russian markets have lost 70 percent of their value. Russia's central bank, meanwhile, has been spent $57.5 billion in two months trying to prop up the country's ailing currency.

"If the current trend continues with the government supporting the rouble, oil prices falling and a slowing economy we are going to have a major crisis," said Chris Weafer, an analyst with the Moscow brokerage Uralsib.

Iran.

Also from the Guardian:

Iran is especially vulnerable because 80 percent of its revenue comes from oil. The IMF calculated recently that for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel. With prices now below $50 the shortfall could be staggering.

The effect of declining oil prices will be felt both domestically and internationally. Ahmadinejad is expected to stand for a second presidential term next June but the lack of cash will restrict his plans to replace subsidies with direct cash payments - widely seen as a vote-buying tactic. US and UN sanctions imposed over the nuclear issue are already limiting Iran's ability to issue letters of credit and thus increasing its cost of trade.

Venezuela.

It's a Guardian hat trick!:

Hugo Chavez has reduced Venezuela's support to foreign allies and is poised to make deeper cuts at home and abroad as plunging oil revenues hit his self-styled socialist revolution.

The government has warned of austerity measures after years of breakneck spending on social programmes, nationalisations, arms and diplomacy, an exhilarating splurge when there seemed no end to petro-dollars.

South America's energy giant relies on oil for half of its exports and 95% of government revenue, leaving Chavez's ideological and political ambitions vulnerable to a crunch.

How the World Works does not feel particularly inclined to shed tears for Vladimir Putin, Mahmoud Ahmadinejad, or Hugo Chavez. But a cascade of imploding economies around the world is unlikely to have salutary effects on the overall health of the global economy.

(Thanks to The Oil Drum for the links.)

The Dow Jones Industrial Average plunged even further on Thursday, closing down another 444.99 points, or 5.5 percent. Who gets the blame this time?

On Wednesday, the New Yorker's James Surowiecki defended a Detroit bailout by arguing that the financial markets were freaking out over the possibility of a Big Three bankruptcy:

More important, the financial markets are clearly telling us that the automakers' failure would be hugely important to the economy. They're telling us both figuratively -- just look at the massive sell-off we've seen in the past week and a half -- and literally, since, day in and day out, traders and money managers are talking about how the fear of a G.M./Ford bankruptcy is dragging the market down.

The Economist's FreeExchange blog promptly disagreed:

This seems far too credulous for Mr Surowiecki. Sure, the issue of the car manufacturers is probably weighing on markets. So is a lot besides. Housing data, price data, bad signs out of the commercial real estate arena, continued pain for financial institutions, scary Chinese manufacturing data, and so on. Markets have a lot on their minds. On the other hand, markets have known for some time that the automakers are in dire straits. People have been speculating about bankruptcy and predicting share values of near zero for months. Markets should have built in a decent probability of failure some time ago.

But did they? While there is again no shortage of bad economic news today, clearly the big story of the day has been the decision by the Democratic congressional leadership to postpone a vote on any auto bailout until Dec. 8. The decision followed news reports suggesting a bipartisan group of senators had come up with a deal to provide temporary bridge loans to automakers, which briefly sent stock prices sharply higher. But once news began to trickle out that Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi saw no chance of a vote happening today, prices began to decline again. And after the House leadership press conference giving the auto industry a deadline of Dec. 12 to come up with a viable plan, the market went into free fall.

Just sayin'.

What are the Democrats up to?

Contradicting news reports suggesting that a bipartisan group of senators had come up with a deal to offer loans to U.S. automakers, Democratic leaders of the House and Senate were adamant in a just-concluded press conference: No bailout for Detroit until automakers come up with a plan showing how government aid will put them on a path to survivability. Senate Majority Leader Harry Reid gave the carmakers a Dec. 2 deadline to present this plan and raised the possibility of a new session of Congress on Dec. 8 to review the new plan and possibly approve a rescue.

Reid and House Speaker Nancy Pelosi reiterated the words "viability" and "accountability" again and again, clearly mindful that public sentiment in the country is running strongly against yet another government handout. Reid made three separate references to the corporate jets the CEOs of Ford, G.M. and Chrysler had flown in to attend committee hearings this week.

"The executives of the auto companies have not been able to convince the American people that this bailout will be their last," said Reid.

Rep. Barney Frank, as is his wont, made the most pointed observation: The money that Congress authorized to bail out the financial industry has not been used for the purposes that it was intended for. The Democratic leadership refuses to repeat that mistake.

But immediately following that press conference, a very disappointed Sen. Carl Levin of Michigan announced that a bipartisan subset of senators had indeed come to an agreement that would use money already authorized from the Department of Energy for retooling the auto industry to build more fuel-efficient cars as a bridge loan to keep the Big Three going. Levin argued that if his proposal was put to a vote today, it would pass. But he conceded that the Democratic leadership had already declared no vote would happen today.

Earlier, Pelosi brushed off a question asking why the leadership was unwilling to use the funds already authorized by the Department of Energy. She noted instead that the White House had the authority to use TARP -- the Troubled Asset Relief Program -- to fund any immediate bridge loans, if it so desired.

So what's going on here? A game of chicken with the White House -- with Reid and Pelosi denying the application of Department of Energy funds and challenging the Bush administration to use TARP funds instead? Or can we take them at their word -- that enough is enough, and there will be no further government action until the auto industry CEOs, in Reid's words, "get their act together" and demonstrate that they have a real strategy for returning to sustainable profitability?

The only thing that seems clear at this moment is that the situation remains highly fluid.