Recent events have lead to a somewhat constant discussion of the economy and how it will either be the necessary catalyst to end the sloth and excess in the western service economy or it will be the end of modern civilization as we know it.  While these results are the obviously the two extremes, it seems reasonable that a once in a century event will have once in a century results.  With that being said, it is also important to truely understand what caused this situation in the first place in order to effectively find a solution.  Furthermore, it is also important to establish a long term goal for the state of the economy in order to draft solution that not only gets our economy out of the state that its in, but rather takes it somewhere we want it to be.  Only that sort of thought and planning will make the economy sound again and prevent the continuing formation of economic bubbles and bursts.  

No matter what the solution, our starting place in our search must be the root cause.  In many things throughout government, economics, and foreign policy this step is overlooked.  This is usually because finding the root cause is usually mistaken as trying to place blame.  The unfortunate aspect to this is that we exchange our more complete understanding of events for the unoffended sensibilities of what is usually a small group.  With that being said the troubles are too severe, and as a result people need to be offended.  

In this root of the problem finding endeavor, many have been quick to place blame.  Frequently you can find a pundit on a cable news network blaming the regulators, or the bank CEOs, or even in a few cases the people who have lost their homes.  No matter who is being blamed, however, the arguement is the same; you don't deserve our help because you made bad decisions.  Banks don't deserve our help because they loaned money to people who they knew wouldn't be able to pay it back.  People who took out loans shouldn't be helped because they should have known they wouldn't be able to make payments in the long run.  Regulators should be fired because they weren't paying attention.  Among this list, there are some that are more culpable than others (I find it hard to think that a bank could reasonably assume they could forclose on more than 5% of homes in a given area without driving down the value of the collateral they were taking...but being stupid is their perrogative), but none of these people are the root of the problem.  The root of the problem is that our economy has been running on credit since the end of World War Two and as a nation we finally defaulted.  

2008 was the first year since the Great Depression that debt held by households in the United States equaled our GDP.  Put in cleaner terms this means that if you took everything produced in the United States and sold it, you would only be able to pay off the debt on things we previously consumed but couldn't afford at the time. None of last year's GDP was able to pay for new consumption to drive the economy, meaning the only thing keeping the economy going was credit.  When the credit dried up it all ground to a halt and we sit where we are now.  Many economists argue that we need to free up credit by giving banks money to loan out, thus lubricating the economy and solving the problem.  I would argue that such an approach is exactly what brought to economy to the state that it is in, and more bad loans to more people who already have to much debt to pay off will not solve the problem.  The root of the problem is that too many consumers are so laden with debt that they can't buy anything else, their income goes to pay the debt they have and pay for living expenses. 

This debt is what is weighing down the economy.  Without this consumer debt, everything would be fine, people would have money to consume things, banks would be able to loan consumers to start businesses without fear of default, the gears keep turning and people start feeling good again.  In fact, given the amount of money we have already spent on the bailout could conceivably be applied to the mortgages of the people of the United States and the root of the economic problem would be solved, and if all we wanted to do is solve the economic problem we would be done.

The truth is there is a greater problem that no one wants to talk about.  There is a problem about how we have grown to see the "American Dream" and its place in each of our lives.  A clear, universal statement of this cultural phenomenon is hard to define, but the basic concept is that America is a place with such great class mobility that your economic class is determined only by your skils and tenacity.  This is not, however, the actuality of the "American Dream" in our daily lives.  In a real sense, the way we treat this phenomenon is more like "Keepin' up with the Jonses" than it is an exhaltation of working your way up.  Your neighbor gets a flat screen TV, so you want one too, you put it on the credit card, and pay it off over three years until its time to get a new one.  The consumption competition pervades our society so completely that it seems that many have forgot that there is a finite limit on what you can consume.  As a result people would push their means to the point that going a bit under for luxury was okay, because you could pay it off later when the raise was going to come or as the house appreciates.    This is the cultural root of the problem, and the solution is simply living within our means.

The complication comes when you attempt to solve the cultural and economic problems at the same time.  If you solve the cultural problem and reduce consumption the recession will worsen.  If you solve the economic problem without the cultural one you give money to people who weren't particularly responsible in the first place, and we will revisit this problem when they overextend their credit lines again.  How do you end the recession and promote smart decision making at the same time?  To what extent are we willing to let people suffer to punish irresponsiblity?  There is an answer, and I think some would call it a bit socialist, but it will work.  

Imagine a situation where the government took on these toxic assets from the bank.  Each bank is paid the remaining principle on the loan, relinquishes all claims to profit to be gained on those loans, and has their balance sheets restored to their former glory.  The banks gain the benefit of removing the toxic assets, but lose their profits and gain nothing from their poor behavior.  These loans are separated and attached to annual taxes of the individual loan recipient, allowing the government to take their mortgage payment or credit card payment directly from the individual's paycheck after a default.  A change to the loan structure may be considered to reduce the profit taken, but a government loan seizure would be added to the person's credit score, reducing the chances they take a loan they can't afford.  The modest profit (interest) taken by the government would be used to pay down the federal debt, improving the strength of the dollar, giving all Americans more purchasing power in a gobal economy.  

This is a complex solution, and the difficulty in breaking up various motgage backed securities would be difficult, but it is the only thing that could conceivably end the recession by stabilizing banks, allowing money to flow, and holding people accountable for the debts they have incurred. 

Obviously this wouldn't necessarily stimulate more consumption,  but I'm not sure that it should.  Perhaps taking some time as a nation to clear our debts is a good thing, no matter how painful it is.