I consider myself to have a somewhat firm understanding of general economic principles. I'm no economist, but I understand how credit greases the skids of the general economy, and how it affects us all. From my point of view, there are a few very simple, though big and far-reaching, things that we must see in order to bring the economy out of its nose dive:
1. Far reaching and permanent tax relief for both businesses and consumers. Payroll taxes are extreme. They've had to be that in order to support a continually growing and bloated government bureaucracy. Payroll and business taxes need to be reduced permanently. This will help businesses, "producers," and individuals, "consumers." More money for both will help both in the short term and the long.
2. Far reaching and permanent cuts in useless government spending, pork legislation, and useless, nonperforming programs and departments. This is needed to offset the tax relief. Finding places to cut should not be hard, but it will require equal measures of balls and political capital expenditure. I believe the incoming administration has a mandate for both.
3. Restoration of business and consumer access to new bank credit under favorable terms. This is the biggie. It requires that banks be compelled to lend the money they have already been given, which they are not doing. It requires that consumers and businesses be compelled to borrow ethically and responsibly, which they have not been doing. There should be no 100% financing of ANYTHING anymore, as that model has proven disastrous. The banking system was used as a no-doc hard money lender where the only required attributes for getting a loan approval were a credit score and the ability to put fog on a mirror. This cannot happen again. Bank money must go to deserving businesses and consumers who have skin in the game. The SBA is not a venture capital firm, there are plenty of those in the speculative market. Bank money should be used to create performing assets with proven documentation.
One could easily say that the packaging of home loans into Mortgage Backed Securities (MBS), as happened in the past few years, was the impetus from which all these other problems have sprung. But careful consideration reveals that the real problem was irresponsible lending criteria put in place for irresponsible individuals to get loans who otherwise should not have been qualified to own a cardboard box, let alone a house. Banks originated these loans with seeming impunity because they had already entered into forward commitments to sell MBS packages made up of vast numbers of these loans to other investors, thereby alleviating themselves of the long term accountability of the pool's actual performance - it was somebody else's problem, the bank made the short term profit. We all know what happened to the buyers of those pools - they generally no longer exist, or at least you and I, through government intervention, are the major stockholders now.
These vast pools were sliced and diced, in an effort to minimize the risk, but it was a giant ponzi scheme, and it came crumbling down as we all know now. The effects reached farther than anyone could have imagined. And banks stopped lending money to ANYONE for a long time.
To thaw that market now will require that the government step in to provide capital to the markets, as they did on Dec 30th, putting money back into the hands of Freddie Mac and Fannie Mae. Much more needs to be done now. But it's a start. Freddie and Fannie now have an outlet to sell well-performing asset pools, giving them cash to buy more of the same from banks and lenders across the country in the future. This needs to continue. The same type of intervention will also be required in markets that are not collateralized by real estate.
Obviously, lenders are requiring more documentation from their borrowers, that aspect of the problem has been solved by the market. There are loans to be had, money to be borrowed, and banks are generally requiring a complete and fair picture of both the borrower and the collateral now, as it should have been all along. Given time, this will help stabilize the real estate markets, long since overpriced and overbuilt. That adjustment will continue, but will hopefully become more stable this year. And some folks need to understand that "The American Dream" is not a right.
And there it is, observations on the economy from a guy who's just trying to get by out here in the crappy real world, and wondering if things will "really" change. Let's hope so.