First there was the subprime mess and the collapsing housing market. Then there was the credit freeze and the imploding banks, the lending curbs, spending cuts, massive layoffs, and plunging consumer and business confidence. Which triggered still more banking miseries, a steeper decline in confidence, and further retrenchment by business and consumer alike.
Welcome to what Federal Reserve chairman Ben Bernanke yesterday described as "the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing."
It's one of the key reasons - along with a deteriorating global outlook - for a particularly gloomy assessment dished up by Mr. Bernanke for the U.S. Senate banking committee to chew over.
On a day when more dismal housing price data and record-low consumer confidence highlighted the continuing plight of the U.S. economy, Mr. Bernanke warned that a full recovery could take more than two to three years and that recent economic forecasts could prove optimistic.
"I believe that, over all, the downside risks probably outweigh those on the upside," the central bank chief said in his semi-annual appearance before lawmakers.
His dour view stems in part from concerns that policy makers will have a tough time breaking what has become a vicious circle of bad economic news exacerbating business, consumer and investor fears, causing them to retreat even further and inevitably leading to further banking woes, shrinking expenditures and even lower economic activity.
"To break that adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets," Mr. Bernanke said in his testimony.
Yet Mr. Bernanke and other U.S. policy makers have helped stoke the very fear now threatening to slow a recovery from the worst economic slump since the Great Depression, some economy watchers say.
"They are contributing to the negative feedback loop with their very convoluted rescue plans," said market strategist Ed Yardeni of Yardeni Research in New York. "There are too many of them. And there are no signs that any of them are working. So policy, instead of helping, is actually making things worse."
Human instincts are also playing their part, helped along by media reports and analysis that focus heavily on the negative, some analysts suggest.
"The problem is that we're back to the psychology of the Depression and that Franklin Roosevelt quote that the only thing we have to fear is fear itself," said Brian Bruce, a professor of finance at Southern Methodist University in Dallas and an expert on investor psychology. "As long as people stay fearful, they make things worse."
Prof. Bruce has also researched the phenomenon of "recency," whereby people look to the recent past to guide their future course of action. If, say, housing and stock prices plunged last year and loan default rates soared, then the prevailing view will be for even more of the same. This increases pessimism about a recovery.
"If you're at least aware you're doing it, that helps dramatically," he said.
But so far, little has surfaced to lift people out of their gloomy thoughts. And government stimulus efforts - whether to protect people from foreclosures, salvage failing banks or pump capital into the economy - are only designed to cushion the slide.
"They can't really sustain a recovery," said Sal Guatieri, senior economist with BMO Nesbitt Burns Inc. in Toronto. "What you need there is time, time for the excesses built up during the debt binge to be worked off."
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1. Bad economic news exacerbates business and consumer fears...
2. Causing them to retrench even further...
3. Leading to further job cuts, shrinking expenditures and lower economic activity...
4. Which produces still more bad economic news...