Wall Street Journal/Corbis

EDITOR’S CHOICE: Some argue that the recession is over, some dispute that. Even Obama cabinet members couldn’t get it straight last week. Time Magazine has made Fed Chairman Bernanke its man of the year – no surprise there, Obama owns Time Inc. Donald Trump says the bailed out banks aren’t lending and the worst could still lie ahead. A review of some of the more pertinent remarks this week:

Alan Binder, a former vice chairman of the Federal Reserve Board, wrote in the Wall Street Journal that The U.S. economy is digging itself out of a deep hole. “You have probably heard a lot of doom and gloom lately, including talk of a jobless recovery, an L-shaped recovery (which means no recovery at all), or even a W -- the feared double-dip recession. The Scrooges have a point: There are serious dangers to the nascent recovery. But you've heard all that many times. Let me offer instead, in deliberately one-sided fashion, the case for optimism. It is, after all, the holiday season.”

SLINGSHOT: Hopefully he isn’t high yet on eggnog, or in California where smoking dope may soon be legal – if not mandatory for survival. Binder starts with the "slingshot effect." That postulates that when the growth rate of any component of GDP rises, it gives overall GDP growth a boost. And going from sharply negative growth to even zero is a notable. Now it's a real phenomenon, he argues.

During the first half of this year, the investment component of GDP declined at a stunning 38% annual rate. Since the investment share of GDP was then about 14%, this implosion accounted for minus 5.4 percentage points of GDP growth. But since overall GDP declined "only" 3.6% in those two quarters, the rest of GDP (the 86%) actually rose.

It was a small but real reason for optimism in a stormy sea, Binder says. Then came the third quarter, the battered investment component of GDP managed to rise (at an 11% annual rate), which added 1.3 points to GDP growth rather than subtracting 5.4 points. That 6.7 point swing was the start of the slingshot effect, which is not yet over.

COMPONENTS: He says investment has three components: business investment, inventory stocking, and homebuilding. Inventory stocks were still declining at near-record rates in the third quarter; they simply must level off within a few quarters because sales are rising and firms will not want to deplete their stocks indefinitely.

Business investment remains 20% below its 2008 peak; but it’s likely course is up, not down, because plants and equipment wear out. And housing? Homebuilding is still in the doldrums -- limping along at less than half the level of 1960. The only way to go is up.

Binder continues: Of course, the investment slingshot won't last forever. Sometime in 2010, consumer spending must take over. And this is where the pessimists go into full throttle. Burdened by huge losses of both wealth and jobs, American households will start saving like mad, we are told. Sounds plausible, but it hasn't really happened.

True, the average personal saving rate has risen to 4.5% of disposable income so far this year from 2.7% in 2008. That's higher, but a long way from the 8-10% saving rates the doomsayers have foreseen. A saving rate near 5% is consistent with 3%-4% GDP growth in 2010.

PRODUCTIVITY: The second major source of optimism is the amazing performance of productivity during the recession. To be sure, that performance had a downside: While real GDP was falling 3.7%, payroll employment dropped 5%, devastating many American families. But by definition, that discrepancy means that productivity -- output per hour of work -- rose substantially during the recession, which is pretty unusual.

The last two quarters were even more extreme: Productivity in the non-farm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the U.S., which is not likely. Two: Fearful businesses pared payrolls to the bone.

PAYROLLS: If the second is closer to the truth, payrolls are extraordinarily lean right now. That means firms will need to hire more workers as their sales and production grow. And that also means that employment may start growing sooner than the pessimists think.

“I have been pointing this out for months, but until the last employment report, it was a hypothesis supported by no evidence,” he says. “Not anymore. While payrolls continued to decline in November, it was by only a scant 11,000 jobs; and the job counts for September and October were revised upward. The data now show a clear trend that suggests that net job creation may be only a month or two away. We'll see.”

There is more to the case for optimism. For one thing, less than 30% of February's $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists note that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package looks to be in the works.

EXPANSIONARY: Then there is the Fed's stupendously expansionary monetary policy. It is well known that interest rates work on the economy with long lags. But the Fed's last rate cut came a year ago. So isn't the monetary policy pipeline empty? The answer is no, for at least three reasons. First, history suggests that the time lag is closer to two years than to one; so even the normal policy lags are not over.

But second, and more important, the lags are likely to be abnormally long this time around. As long as the economy's credit-granting arteries were blocked, they could not carry the Fed's lower-interest-rate medicine into the economy's bloodstream. Sadly, some of these arteries remain blocked today -- such as for small business lending.

But the Fed, Treasury, FDIC and others have created a bewildering variety of stents and bypasses to get credit flowing again. The credit markets are now healing, though slower than we would like. Hence there is still monetary stimulus in the pipeline.

And third, the Fed continues to inject more medicine. Not by cutting interest rates, of course. Zero is as low as you can go, and the Fed arrived there a year ago.

EXIT STRATEGY: But "quantitative easing" is still in play. One example is the mortgage-backed securities (MBS) purchase program, which is adding MBS to the Fed's balance sheet and providing vital support to the mortgage market. Yes, the Fed has begun to think about its exit strategy. But that is for the future, not for now.

Binder concludes: “Serious downside risks remain. The investment slingshot and the fiscal stimulus will both peter out in 2010. Consumer finances and confidence are shaky. Banks are still failing and commercial real estate is a mess. We cannot count on exports to pull us out of this slump. And these are all reasons we should not to expect the kind of exuberant boom that typically follows a deep recession -- such as the 7.7% growth spurt in the six quarters following the 1981-82 slump. So my optimism is guarded. The 3%-4% growth rate that I anticipate for the rest of this year and for 2010 is a lot worse than 7.7%, to be sure. But compared to what we've been through, it will feel a whole lot better.”

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INSTRUMENTS: Meanwhile, Paul Volcker, chairman of the President's Economic Recovery Advisory Board and a former Fed Chairman under Presidents Carter and Reagan., blames “all of those mind-boggling financial products that nobody understood,” for the sorry state of the U.S. economy.

At the Wall Street Journal's Future of Finance Initiative conference in London recently, and reported in MarketWatch, he said: “There is not a "shred of evidence" that innovation provided any benefit. Volcker pointed to credit default swaps and collateralized debt obligations (CDO) as among the innovative financial products that, "took us right to the brink of disaster."

The economy "was quite good in the 1980's without credit-default swaps and without securitization and without CDOs," Volcker said. While he said he was not opposed to innovation per se, "I do not want to stop you all from innovating, but do it within a structure that will not put the entire world economy at risk." Summing up his thumbs-down view on previous innovations, Volcker said: "The most important financial innovation I've seen in the last 25 years is the automatic teller machine."

BUFFETT: Once Warren Buffett agreed with Volcker. Credit default swaps "are financial weapons of mass destruction," Buffett once said. But with a change in SEC regulations of the notorious CDS earlier this year, Buffett's Berkshire Hathaway has issued $4 billion in CDS, according to a Forbes.com report.

And Diane Swonk, senior managing director and chief economist at Mesirow Financial agrees with Trump, saying that, “The headwinds associated with the credit crunch will linger,” and limit the degree to which the U.S. economy can recover from the recession. “We should be at 6 percent growth, rather than 3 percent,” she writes in her firm’s annual economic outlook.

“The economy surged at a 7.7 percent rate for six consecutive quarters as it emerged from the recession of the early 1980s.” For the next year, Swonk says, the U.S. economy will continue to grow, but only tepidly. “Consumer spending is expected to rebound, aided initially by pent-up demand and the spillover from the 2009 pick-up in home sales,” she believes. “It takes at least a year for homeowners to fill and remodel the homes they just bought.”

TIGHT CREDIT: Persistently tight credit, however, she thinks will stop the savings rate from falling back to zero in the U.S. “The era of living chronically beyond our means has passed,” says Swonk. “Credit available to consumers and small businesses, however, is still a small fraction of what it was prior to the recession.”

As a result of these factors, the economy is likely to grow at just 3 percent in 2010, which is quite weak relative to history, “but still slightly above the economy’s underlying potential,” says Swonk. Unemployment may have peaked and will trend down during the last two quarters of 2010. Others agree. The BBC is reporting that the credit crunch is harming entrepreneurs, dimming their dreams of expansion.