But Marston is very concerned that the slump in the U.S. housing market could undermine consumer spending, causing real economic trouble. “I really think this is going to be a more prolonged decline than other people think,” he says, noting that after real estate prices dropped in 1989, it took many parts of the country until the mid-1990s to recover.

The housing sector is especially risky because of the mushrooming use in recent years of adjustable-rate mortgages and sub-prime loans, he adds. Many of the variable-rate loans issued in recent years are now adjusting to higher interest rates, causing borrowers’ monthly payments to soar. “What we’ve done is made our financial markets efficient enough to let families dig holes to bury themselves.”

Recessions often come in the wake of big gains in asset prices, Marston notes. The recession of 2001, for example, followed the big stock gains of the late 1990s. In recent years, the asset-price gains have been in housing. On the other hand, inflation does not appear to be a serious threat, he says, so the Federal Reserve may be able to cut short-term interest rates in 2007, helping stimulate the economy to offset damage from the housing sector.

Nevertheless, Marston puts the odds of a recession at only 30%.