What Should Our Expectations for the US Financial Future Really Be?

From the end of World War II through the end of the century, the United States economy enjoyed what can only be described as one of the longest cycles of expansion ever experienced. Sadly, during that period of time something went wrong. We used to save money for things we wanted. When we bought on credit, lenders expected us to put something "down" in order force the borrower to share the risk of loan default. Lenders also expected that the borrower show proof that they would have the means to repay their loans.

However, we turned into a nation of people who were not satisfied to wait to buy what we wanted. Credit companies were happy to feed our addiction to buy whatever we wanted, whenever we wanted, at an APR from 8.99% to 29.99%. Banks and mortgage lenders, desiring to get in on the action, decided that it was OK to approve a loan for 100% or more of the value of a house. Worse still, they also decided that those mean-old tests for determining if the borrower actually had the capacity to repay what they borrowed.

With the glut of easy credit and what apparently seemed to be little or no threat of financial danger, Americans gladly spent like drunken sailors on shore-leave. What was there to worry about when the home bought last year for $200,000 was now worth $225,000?

The danger was always there. With all that easy credit around, our voracious appetite for consumer goods superheated the manufacturing sector. To provide all the stuff we wanted, those companies had to expand at unreasonable rates. They had to hire people, build plants, expand lines of supply and distribution. And Americans were perfectly happy to buy homes and goods they couldn't really afford at a percentage of their income that left no room for saving.

Simply put, we built an economy that could not survive through any kind of slowdown. Our demand for instant gratification left us with providers of goods and services who could not afford even the slightest contraction of growth.

I believe that the following things are going to happen:
1) Housing values are going to continue to drop until they are once again in line with the Gross Domestic Product. I do not believe there is anything the federal government can do to prevent that. I further believe that TARP, AR&RA and further stimulus will only prolong the pain by attempting at great cost to our descendants to stop the unstoppable.
2) Americans are not likely going to forget what they are living through right now. Saving money is going to again become a priority. Debt will again be seen as a bad thing, not something to be accepted in order to have the bigger house or Beemer in the driveway.
3) Unscrupulous lenders who followed imprudent business practices are gone or they are being propped up by TARP money and now subservient to the American taxpayer through the federal government. Lenders who were more prudent have watched and learned . The have already begun tightening the requirements they will hold borrowers to.

And what that means is that this will take time. As a society it will take time for us to become credit-worthy to borrow. We will have to buy smaller. We will have to save, because we will be required to put money down on goods we buy with other people's money. House values will increase slowly only as the huge surplus of foreclosed homes are sold off at values that are only a fraction of what they once sold at. Our recovery must come with the expectation that our society will look different than it did before 2007/2008. We will spend less of our discretionary income on consumer goods. We will apply for less credit either because we as a people recognize that this is the correct thing to do or because we simply will not qualify for credit under stricter lending guidelines. And after all is said and done, we will have one heckuva whopper bill that we will have to pay. At MY last count, we are talking about two-thousand two-hundred MILLION dollars of debt that our future generations will have to repay.

Oh yeah. Government will have to spend less too. I'll talk about that sometime in the future.