<blockquote>"
For a time earlier this decade, it was intellectually fashionable among economists to point out that the size of the nest egg — not the money flowing into it (which was the basis for the official saving rate) — mattered most. By this standard, the country’s savings behavior was perfectly healthy. The ratio of household assets to income actually looked high. In 2001, Lehman Brothers — yes, that Lehman Brothers — put out a report with the mischievous title of “Are U.S. Households Saving Too Much?” One section was called “Forget Ben Franklin.”
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Well into the 1940s, Americans wondered whether the hard times had really ended. They spent the next few decades behaving as if the country’s prosperity depended on their actions. They saved money, which provided the capital for the great postwar boom and also paid for their retirement. Then came the change, and many of us began to assume that prosperity was an inalienable part of life, regardless of what we did. We failed to be sufficiently afraid of the alternative. A little fear can often be a healthy thing."</blockquote>
The Price of OptimismBy DAVID LEONHARDT
October 26, 2008
SourceOn a recent morning in Manhattan, a friend of mine walked into his bank, carrying his briefcase. He went up to the teller’s window and asked to withdraw thousands of dollars of his savings, which the teller handed over in $100 bills. He then walked home, holding his briefcase a little more tightly than usual, and put his money in a drawer.
Was he being a little paranoid? He knew that he was. His savings were guaranteed by the Federal Deposit Insurance Corporation, which, as government officials have been reminding us lately, has never failed to cover a bank deposit in its 70 years of existence. Cash in a drawer comes with no such guarantee. If there’s a house fire, the money is gone. But my friend figured that even if his savings were at no real risk of disappearing at the bank, they might become unavailable to him for some period of weeks or moths, were the financial crisis to keep worsening. He didn’t like that idea. So he was willing to give up a few months of interest — meager interest, to be sure — in exchange for a sense of control. Given all of the once-unthinkable events that had already happened, it was hard to know what might come next.
For the better part of the past two decades, Americans have been living in a state of willful optimism about our financial future. It is probably fair to date the start of this period to the late 1980s, when the stock market took off and the Soviet empire began to unravel. Since then, our default attitude toward the economy has been to believe that, one way or another, things will work out.
Companies began ditching their pension plans, forcing workers into riskier 401(k)s. But, really, how risky could they be? They were invested mainly in the stock market, one of the most profitable investment vehicles in the history of mankind. We became so comfortable with Wall Street, in fact, that we moved money out of boring old F.D.I.C.-insured accounts and into uninsured mutual funds. Many people simply stopped saving altogether. So did the federal government in the last several years, despite the enormous Medicare and Social Security bills that are just around the corner. We told ourselves that everything would be fine, because the alternative seemed so implausible.
The personal saving rate — that is, income minus spending — arguably tells the best story about our recent optimism. From the mid-1950s through the mid-1980s, the rate hovered around 9 percent, which meant that, on average, Americans set aside nine cents of every dollar they earned — to use in the future on college tuition, a down payment, retirement or an unexpected misfortune. In the late 1980s, however, the rate began to fall. In the 1990s, it averaged only 5 percent. In the last several years, it has barely exceeded zero.
There was a simple enough justification for the decline. Since the 1980s, incomes for most families haven’t been growing very quickly, which has made it more difficult to save. At the same time, the value of assets, mainly houses and stocks, was growing enormously. So nest eggs continued to get larger even without much new money flowing into them.
For a time earlier this decade, it was intellectually fashionable among economists to point out that the size of the nest egg — not the money flowing into it (which was the basis for the official saving rate) — mattered most. By this standard, the country’s savings behavior was perfectly healthy. The ratio of household assets to income actually looked high. In 2001, Lehman Brothers — yes, that Lehman Brothers — put out a report with the mischievous title of “Are U.S. Households Saving Too Much?” One section was called “Forget Ben Franklin.”
The hitch, of course, was that asset values had to stay high. Many people simply could not conceive of another outcome. Not since the Great Depression, some analysts noted, as if to underscore the absurdity of such a possibility, had house prices fallen nationwide. And even skeptics had a hard time imagining that the situation could get nearly as bad as it has. I was one of those journalists who tried to point out over the past decade that house prices and stock values were getting out of control. Yet when I look back at those articles now, there are still passages that make me cringe. In 2005, while describing the dangerous boom in adjustable-rate mortgages, a colleague and I wrote, “The impact is not likely to derail the economy on its own, economists predict, but it will probably slow growth.”
The point of that sentence was to make clear that we weren’t anything like those crazy people walking around with doomsday sandwich boards. We understood that, despite our concerns, everything would work out just fine. It always had before, hadn’t it?
At times over the past several weeks, the country has certainly gone too far in the other direction. Our binge of optimism has been followed by bouts of deep pessimism, which is a dangerous combination. It’s the stuff of bank runs, stock-market crashes and once-in-a-century economic downturns. Finding the right middle ground — in which we neither hoard our way into a deep recession nor spend our way into bankruptcy — will not be easy. But it’s also not impossible. Economic mores can change.
Well into the 1940s, Americans wondered whether the hard times had really ended. They spent the next few decades behaving as if the country’s prosperity depended on their actions. They saved money, which provided the capital for the great postwar boom and also paid for their retirement. Then came the change, and many of us began to assume that prosperity was an inalienable part of life, regardless of what we did. We failed to be sufficiently afraid of the alternative. A little fear can often be a healthy thing.
David Leonhardt is an economics columnist for The Times and a staff writer for the magazine.