As I write this article, credit markets are seizing up in an alarming manner pending a bail out plan by Congress. Banks are so scared about the situation that they are afraid to lend to each other, let alone to the consumer. What does this tightening credit market mean for the average American consumer? Well for one thing, it's going to necessitate that we pull back on our binge spending. I heard a reporter on one of the business news shows saying that people might have to put down 20% to buy a car unless the credit market is saved. Is that such a bad thing? I'm sorry that you're going to have to put 20% down on that brand new BMW or Mercedes or Lexus....really I am.....I'm sorry that maybe you'll have to settle for a used Toyota sedan that you can really afford! Oh the horror!

Seriously, I acknowledge the gravity of the situation in the credit market and the implications for the broader economy. The reverberations from the collapse of Bear Stearns, Fannie, Freddie, AIG, Lehman etc. and the ensuing credit tightening will no doubt cause a contraction in economic growth, regardless of what Congress does. We have simply overspent as a nation, due to the easy credit available in the past. Perverse monetary policy (i.e. ultra low interest rates set by the Fed for far too long) certainly contributed to our collective binge. This set up a culture of envy and a "keep up with the Jones's" mindset. Well, as it turns out, the Jones's were financing their high flying lifestyle with credit, and now the Jones's are BROKE!

My good friend Mike lives in San Diego, CA and chose to rent a house when he and his family relocated there about 4 years ago. Mike refused to pay the exhorbitant prices for real estate and didn't buy into the hype of "housing prices will only go up and will never go down". He even argued with a snippy real estate agent (barely 21 years old) who tried to convince him that real estate couldn't go down. Mike even argued with his wife about this. He made the decision to rent and his wife thanked him later when housing values crashed.

Mike still rents to this day, and will probably get a good deal when he decides to purchase in a couple years when home prices have collapsed even further. During the peak of the housing boom (around 2005-2006) Mike was looked upon with disdain by one of his neighbors, because he was renting a house instead of buying one. The neighbor said "why are you renting?", as if to imply there was something substandard or wrong with Mike. You see, here in many parts of America, there was a condescending attitude perpetrated by some homeowners towards those who were merely renters.

This culture of arrogance and hubrice was made possible by easy monetary policy that made people 'feel' rich when their home values soared. Home equity lines of credit allowed people to use their homes as cash machines. People bought jet skis, big screen TVs, ATVs, new cars, trucks, SUVs and all sorts of goodies with their new found "wealth". Right around 2005 I remember seeing many 20-somethings driving around in brand new luxury cars and SUVs. Alot of illusory wealth was created. I remember thinking to myself, "geeez how are so many people able to afford such nice, expensive brand new vehicles? What is wrong with me?". The reality is, alot of those people really couldn't afford those vehicles. Many of the vehicles were either leased or bought on home equity lines of credit, many of which are now in default. Many auto loans are going into default as well, as the adjustable rate mortgages on home loans forces people to choose between making the payments on the auto loans or their homes.

As I write this in September, 2008 the credit markets have frozen, Fannie Mae, Freddie Mac, AIG have been bailed out by the government (to avoid a complete collapse of credit default swaps) and Lehman Bros. has gone down in the largest bankruptcy in U.S. history. Banks such as Wachovia and Washington Mutual have been absorbed by bigger banks to avoid an outright collapse which could have caused the FDIC to run out of funds. Bear Stearns has imploded and other large investment firms have or will be absorbed by larger banks or will be converted into commerical banks before they collapse. It is clear that there will be a significant impact to the economy and that we're in for a severe recession at the very least - no matter what the government does to try to stop it.

If there is any light in all of these dark clouds, it is that the financial mindset of the American consumer will be changed. Americans will now be forced to live within their means and buy only those things that they can afford. They will have to become less dependent on credit cards and home equity loans. The $6 lattes have fallen out of favor. The materialistic arrogance has been somewhat tempered and replaced by fear - fear of recession or worse. Perhaps now, Americans will become more disciplined savers and save up to buy something they really want, instead of buying things on credit right then and there. Will frugality come back into fashion?

Maybe Americans will adjust their values and appreciate other things in life besides the material objects. Family, friendship, integrity and honesty are things that simply can't be bought, and their true value in life is far greater than any toy you could buy on credit. Maybe now, more of us will start to realize that.

By the way, in case you're wondering whatever happened to that guy who put down Mike and criticized him for being a renter instead of an owner, here's what we do know. One day, a moving truck appeared at the guy's house and the next day it was gone. The guy moved out and didn't say a word to anyone in the neighborhood, and within a month or so the lawn turned from green to foreclosure brown. Seems like the concept of "just buy a house and you'll be rich" has disappeared along with the people that lived in houses they couldn't afford.

Update: Check out the link to the video about southern California's "foreclosure alley" (see links below). This outstanding video from KCET shows just how much the real estate market has deteriorated in the Inland Empire of southern California. Of particular interest is the guy who started a business of spray painting lawns. That's right! The banks hire him to spray paint the lawns green to hide the brown grass and make the foreclosed properties look better.