No Such Thing as Free Enterprise. There hasn’t been a free market in the U.S. since 1917 (The birth of the Federal Reserve). True capitalism includes the checks and balaces, booms and busts of a free market. However, when things like money supply are manipulated by an outside force, the booms and busts are about as real as Spongebob Squarepants.
Moral hazard is moot. The basic truth remains that the economy is driven by consumption. Without some sort of debt relief (be it from the banks taking losses or taxpayers funding GSE mortgage insurance organizations or stimulus packages), people will not consume to the level needed for the economy to pick up speed. Money – wherever it comes from – needs to go into spending, not repayment of debt. Yet, because FICO is so important (or so we have been convinced by Suze Orman) Americans will save and pay down debt rather than continue to consume.
There can only be 2 results:
1 – The economy will flatline as Americans save up, stop spending and work to live debt free. They may even do something as nightmarish as teach their children to be debt free!
2 – FICO will go away. The next boom will flower as collateral becomes everything and as long as you can fog a mirror, you can get a loan. If credit-worthiness is putting a chokehold on consumption, the key to breaking the chokehold is in to lend on collateral-worthiness instead. If you own anything that has liquid cash value in the world, you can get a cash advance on 50% of its value. Want proof? Just look at your neighborhood pawn shop or talk to a hard money lender.
Regarding the short-term recession beast… it will get fed and get fed good. The near term solution to the “slump” will come from the new fever or cooperation between the Fed and Congress. The meal will consist of permanent tax cuts to businesses and massive tax reform for the tax base. Perhaps even a well disguised mass amnesty to increase the tax base and BUUURRRP! Recession beast is satiated and the next boom (in real estate) ensues.
