I have been hearing and reading a lot of angst about the tight credit markets, and that this is the cause of the economic downturn.  But really, weren't the credit markets and lending in general far to loose to begin with?  Economics is not really much of a science, it is more a series of extrapolations based upon a few hard facts and a bunch of suppositions.  One of those suppostions was that real estate does not decline in value, it may stagnate, but it does not decline.  This may seem laughable now, but up to 2006 and early 2007, this was a bedrock truth for anyone working in the real estate market.  Another bedrock truth is that 10:1 leverage on lending is safe, meaning that a bank can lend out 1 million in loans for every 100k in hard assets (a very liquid and changable term) and be safe.  A great deal of scorn was heaped upon banks lending out at 30 and 40 to 1 margins, which no doubt is way to risky, but it still assumes all the fiscal strife would have been avoided if the 10-1 rule were observed. 

This cuts both ways of course, from the stock market peak of around 14,000 to the current levels of about 6600, I have heard estimates of almost 7 trillion dollars in wealth has been lost.  Except that isn't true.  The major players in the stock market do not use real money in the purchase, they leverage themselves in.  So at a 10-1 margin, say I get 1 million of stock backed up by 100k of real money, if that stock loses 90% of it's value, I am really out 100k due to a margin call but the value of the loss appears to be 900k.   Not as bad as it would at first appear. 

With the loss of precieved wealth, the banks should not be able to lend anywhere near what they used to, and relying on 10-1 credit margins to prop up value is an unstable model to begin with.  It is almost like there is two different values for a dollar, the cash dollar that you actually work for and spend on little things like food, gas, and the day to day staples in your life you buy with cash, checks, or credit cards.  Then there is the credit dollar for large purchases like cars, homes, education, and unfortunately large medical expenses.  The real dollar is much more firm and stable, it is what you get paid in and what you spend and save, the credit dollar is the one being effected by the swings in the markets.  For large business, the normal currency is the credit dollar.  There needs to be greater parity between the two, because right now there is a huge disconnect, but current policy seems to be trying to enforce the disconnect instead of reconcile the discrepency.

  I think this comes down to making sure there is more skin in the game before a loan is made.  For houses, make sure that there is really 10 or 20% down payment before allowing a purchase.  Short term this will make buying a home harder, but long term it will stabalize the market and bring prices down further.  How many houses do you think would be sold for 500 thousand dollars if you had to bring 100k in real cash to closing. For education, require a set percentage of tuition to be paid in cash, this will again make things harder in the short run, but will force schools to lower tuition to keep admissions up.  College used to be something you saved for and paid out in advance, now it is a never ending debt obligation.  The only real winners in the current system are the financial servicers.