By: s.i. wells

It is time to get real and realize that the system of credit in America is completely broken.  It is time to forget how we got to this point.  It is time to figure out how we get America moving forward again.

Forgive me for stating the obvious, but when there is no credit extended to companies and to people, transactions will grind to a halt.  Our beloved Visa, Mastercard and American Express credit cards with ever diminishing credit limits will soon be regarded as “liability cards” - good only as an account to payoff over time.  Banks will not be able to lend, even if they are pressured to do so by the government, because as the business of America slows, so will the cash flow of many consumers.  Maybe a day will come when employers will be forced to delay a paycheck for a few days or a week and employees will have to make the choice between paying their mortgage on time or making a “liability card” payment instead.

Bottom line - the metric by which individual borrowers are judged, the FICO score, will begin to reflect the stresses of this vicious cycle.  As FICO scores descend, so will the ability of people to get even the most basic of loans, i.e., car loans.  No car loans, then no cars will be sold.  No cars sold, then more people tied to the auto industry will lose their jobs.  And so the story will go from one industry to the next.

If a metric no longer serves the greater good and in fact prevents the recovery of commerce, then we should abandon the metric.  If we eliminate the FICO score, banks will have to look at a potential borrower’s balance sheet, income stream and tax returns to make a judgment about extending credit.  A loan will have to be a personal transaction and not one principally based on a FICO score.  If, however, we keep the FICO score as the linchpin of our consumer credit system, then banks will be reluctant to extend credit even to creditworthy borrowers whose FICO scores reflect even a slight headwind.  If we continue to live under a computerized, national credit system that is controlled by the credit card companies, America is in for an extended financial nuclear winter.

Every day the Congress is busy changing the rules to keep certain industries alive during this financial meltdown.  Wise men have said that the consumer must begin to spend to get the economy going again.  If the consumer is prevented from borrowing for years to come by an inscrutable and Orwellian FICO system, then we all need to duck-and-cover as the radioactive cloud of this financial crisis spreads wide across Main Street and destroys the fabric of American commerce.

So the plan should be simply this - the Federal Reserve should issue a new banking regulation that prohibits banks from considering the FICO score of a potential borrower when making a credit decision.  Require banks to do their own due diligence and make their own decisions.  In this way, banks will no longer be hamstrung by a metric that is part and parcel of the current financial nightmare.  Let each local bank come to know each borrower and make credit decisions the old fashion way.  Either abandon the FICO system or prepare to endure depression economics.