Asset markets are crumbling. First the housing market, then the credit markets, and finally the stock and commodity markets. The “real economy” will follow.

There will be bounces and big rallies in all of these markets at various times. Gurus and analysts will swing between depression and euphoria, just like everyone else. But the mood swings are only for trading. The real issue is the establishment of a sound basis for future growth, which is what is needed for the return of investment, as against speculation. We need to see:

• A healthy environment for, and a respect for, work and saving. The economy is sick because it has been overdosing on credit. People need to return to making what they spend and spending less than they make. Personal savings rates well north of 10%.
• A return to responsible lending practices, where borrowers have “skin in the game” and are not being fooled by “teaser” rates, and lenders have a reasonable expectation of being repaid.
• A reduction in the burden of government, which spends 44% of U.S. GDP in non-productive ways, like wars.
• Acknowledgment by the monetary authorities around the world that they cannot manage the economy and a sincere commitment to stop trying.
• A return to historical compensation practices, so that income inequality is reduced and daylight robbery by corporate executives, the financial industry, lawyers, doctors, politicians and government employees is brought to an end. The “Second Gilded Age” must come to an end.
• Reform of the inbred and non-responsive political system, so that is not just a spoils system but a government of the people, by the people and for the people.
• Share prices that offer the prospect of a return on investment based on dividends and growth, not illusion and speculation. This includes the end of option-based employee compensation that is a hidden tax on shareholders.
• The return of inventory levels of housing back to normal, that is in the 6-month’s supply or less. And the same for the glut of commercial space which is just now starting to become apparent.
• Substantial reductions in the financial services industry, including banks, brokerages, hedge funds, mutual funds, real estate agents, mortgage brokers, attorneys, planners and all the other financial parasites. We need to see bankers driving taxis (and we will, count on it).
• Substantial reduction of the hidden tax on business otherwise known as the plaintiff’s bar. Way too much money flows into the hands of “trial lawyers” without any redeeming social benefit.

Never happen, you say? Then no recovery for us, I say.