All of the ingredients that contributed to the first great depression were once again mixed together to create the next great depression.  Seems we did not learn anything the first time around.  Easy money was the primary contributing factor that led to the great depression that started in 1929 and lasted into the late 1930s.

Installment credit/buying on credit was a huge problem in the 1920s as not many people took into consideration the future.  People bought everything from automobiles to furniture, appliances and luxury items they could not afford.  This was great for the economy and everything seemed to be going well.  Business was booming and companies were expanding and growing.  Americans were spending like never before (with money they did not have) on just about everything they could their hands on.   The roaring 1920s and the roaring late 1990s/2000s were falsely created by the extension of credit and escalating real estate prices and not by actual wealth or savings.  Just like in the 1920s the coming depression resulted from the collapse of the real estate market and tightening of consumer credit.  This led to a large number of businesses shutting down and massive bank failures.

As you have noticed, I am already referring to the coming second great depression as something we are experiencing.  We all need to be realistic about this.  We have gone beyond a recession and we are heading directly into a depression.   We can not wait for the experts, economists and Politicians to tell us that we are in a depression.  By the time they get around to figuring this out we’ll be coming out of it and heading into a third great depression.

As we move to deal with this developing depression, businesses are going to have to drastically change the way they sell their products to the public.  To survive and stay in business, they can not continue with their reliance on the extension of bad credit, with 0% percent or very little down, no payment for a year and even two years.  Businesses are going to have to become creative in other ways, while at the same time making sure their essential products are affordable and available to everyone.  Businesses are obviously in business to make a profit so they can grow and expand and as such they need to protect their investment by requiring a larger down payment, specifically if the purchase is for a house, car or an entertainment system.  To some degree the automobile industry started protecting some of its investments with the introduction of vehicle leases many years ago.  Automobile leases are based on the depreciation value, other fees and finance charges.  Leases usually require a large upfront payment and higher monthly payments.

If businesses adopt more stringent lending practices, Americans will be forced to save in order to come up with the down payment for the purchase of things we can not afford to pay cash.  This will also change us from a nation of borrowers and into a nation of savers.  To build real wealth when we buy appliances, cars or purchase a house, using actual money, if we take the money out of savings for the down payment we will then have an immediate ownership interest, instead of negative interest as it is currently the case with negative mortgage amortization (Negative amortization arises when the payment made by the borrower is less than the accrued interest and the difference is added to the loan balance).

A borrower’s ability to borrow and use credit should be predicated on a formula based on the available cash and investment on-hand, in addition to current salary and not just a credit score or salary alone.  Since we no longer have permanent employment or a good and reliable retirement system, this should also take into account the possibility the borrower may become unemployed for up to a year.  Credit limits on credit cards should not exceed a predetermined amount on all the credit cards held/offered to the individual.  Meaning, if it is determined that an individual should only have a $25K credit limit on all the credit cards combined, including department stores credit cards, then that individual should not be allowed to exceed this credit limit.  The question that needs to be answered is, if unemployed for a year, can the borrower still pay all the bills?  A person earning $100K annually should only be given credit card/department store credit not to exceed $10K and not in excess of $25K as it is currently the case.   Credit cards credit limits should not exceed 10% of income.

It is relatively easier for people to walk away from their homes (mortgages) and not pay their bills, because many bought properties, cars and expensive entertainment systems without having to put up a dime or very little.  The way some people see it, they have nothing or very little to lose by walking away from paying their bills.   

We do not want our grand children to go through a third great depression.   But just as we did not learn from the first great depression, I am certain we will not learn from the second one either.  Once we come out of this depression, it will be business as usual until the next one and greed will return all over again creating one bubble after another.