For the last couple of months my biggest concern has been the level of credit in the market dropping, and it would appear that it is only now just starting to take hold: Lending shrinks for first time in 16 years - Local News - News - General - The Canberra Times RBA gets point with rates jolt I know in times like this everyone is told to pay down debt or spend, spend, spend, but the reality is that if the credit in the economy starts to significantly decline (which is for all intents and purposes the same as a money supply contraction) this is when asset prices are really going to start falling. My point is that it doesn't matter what the interest rates are, if people don't borrow money to buy houses then the price of houses are going to fall! Australia's housing boom over the past few years has been fueled by massive credit/debt expansion, for prices to be sustained we need to maintain that level of credit in the market, but at this stage it is looking less likely. I don't know what the solution is, but obviously aggressively dropping interest rates isn't doing enough right now to maintain credit levels, and whilst I can appreciate that credit levels do need to be reduced but we need to make sure they don't go into free fall. I should also point out that I'm not advocating that credit levels should be increased - they have far exceeded any rational level, but a quick contraction will be disastrous. I for one think that at the end of all this Australia should really look place some more aggressive regulations on the rate at which credit can grow within this country. By that I mean place tighter regulations on both the RBA and their ability to move interest rates and both the RBA's and private bank exploitation of fractional reserve banking. I mean people always talk about "the business cycle" like it is a natural phenomenon, but the reality is that it is a largely create phenomenon through both credit expansion and contraction which is exacerbated by the coming and going of consumer confidence. I think we should have interest rate targeting as much as inflation based targeting as inflation is just a by product of an increase in the quantity or velocity of the money supply. Placing a range on the cash rate of something like 4% - 6% should limit the scope for both expansion and contraction of the money supply, as thus inflation. This would need to be coupled with limitations being placed on fractional reserve banking, maybe setting a range where banks need to keep 33% - 20% reserves on credit loaned out. This policy would obviously have to be on that is phased in because it would greatly reduce the money supply in the system at present, which interestingly enough I can't find any data on... (I'm going to just assume that the current fraction reserve requirements are around the 10% mark, though I know a lot of international banks were lending at much lower reserves than that). These two amendments would greatly reduce both the RBA's and the private banks ability to influence the money supply. Obviously it isn't the best solution (destroy the RBA and create a government backed, debt free currency which grows at the rate of population growth) but I fear that a radical change is much more difficult to gain support for than minor change, and I think the tactful solution to this crisis is to boil the bankers slowing rather than throw them into boiling water where they may look to jump out and fight back. Anyone care to discuss the issue?