An Economy Without Consequences

If your expectations are that we'll all suffer through this economic downturn over the next year or two (or maybe longer) before "things return to normal", think again.

I fear that our expectations are to return to cheap money, no money down mortgages, 0% financing on new cars etc.

I don't think so.

In order to make sure this doesn't happen again, rules will be put into place that force creditworthy lending to take place.

When I went for my very first pre-approved mortgage, my banker asked whether I had my 20% down payment ready, then proceeded to verify my employment and income, then told me how much money I would quality for. The amount I qualified for was based upon industry wide standards (a ratio of my income), which prevented over zealous borrowers to get in over their heads.

And if I was dissatisfied with the number, I could always go to another bank, where the very same criteria would be applied to my mortgage application. This tight regulation "forced" a model of borrowing responsibility and prevented the chaos that we've seen over the past couple of years.

It was a built in hedge against economic downturns, because people still had some wiggle room in their budgets to meet mortgage payments, if they suffered a temporary income problem.

Sometimes I get the feeling that our expectations are that when this crisis is over, that things will return to "normal" - with normal being a state of unrestrained consumption and unrestrained borrowing.

That will not be the case.

Our long term economic survival will depend upon MUCH larger saving rates, less personal borrowing, and more "living within our means". I think that we'll be forced into an age of "taking personal responsibility" for ourselves.

We won't be able to count on social security, universal health care, medicaid because the country can't afford it (if we waste Trillions on bailouts).

Let's face it, our economy has to go through a contraction. Some car companies must die. Some major banks must die. It's absolutely necessary for the economic "cycle of life" to continue. There must be consequences to gross mismanagement. Banks must pay the price for taking on too much risk. Investors must pay the price for blindly putting faith in investments with unrealistic returns (Madoff anyone?).

Lessons must be learned, or we're bound to repeat the same mistakes.

We'll have learned this lesson when "debt-free" becomes "cool".