A Return to Thrift

Fortune Magazine) -- Sometimes it takes a near-death experience to change bad behavior. Think of your friend who quit Lucky Strikes after a coronary incident. Or look at how banks are reducing their dependency on debt after watching rivals go belly-up.
On Wall Street this process of reducing debt relative to equity is called deleveraging. Main Street should be deleveraging too.
Deleveraging is different for people than it is for companies, however. Big institutions are selling equity to pay down debt, but most individuals can do little if any of that. Their largest asset is probably their home, which they don't want to sell because they need a place to live, and in today's environment it may be worth less than the mortgage balance. So for most people the only way to pay down debt is to cut back on spending, or to use a quaintly antique term for it, be thrifty.
To realize how far we have gotten away from thrift, consider how those in the Greatest Generation financed the big purchases of their lives and how little cash the Facebook generation puts down for homes and cars or how comfortable they are with credit card debt. The present crisis could actually be the ideal moment to make thrift cool again, because debt has rarely been in worse repute.
Debt got us into this mess. Blaming the subprime lenders has become popular, and in some cases they were deceptive, but most borrowers knew perfectly well what they could afford. Millions joined in the debt mania, and now we're paying the price. Maybe American culture is ready to turn a corner.
It's an idea that's gaining momentum. The Thrift Project, a research effort by several think tanks, has produced a recent report ("For a New Thrift: Confronting the Debt Culture"), a book, and a traveling exhibit. Ronald T. Wilcox, a professor at the University of Virginia's Darden Business School, has written a book called Whatever Happened to Thrift?: Why Americans Don't Save and What to Do About It. The common message: America's debt addiction is seriously bad news for the country, and solving the problem requires action on many fronts.
The researchers of the Thrift Project believe we need to change our institutions. Most big banks are no longer very friendly toward small savers or even present in less than affluent neighborhoods. Meanwhile, state lotteries are depressingly effective at getting poor people to put their scarce dollars into essentially negative-interest "investments."
Wilcox believes we can use the findings of behavioral finance to entice people to save more - for example, by changing the default choice in 401(k) plans so that employees have to opt out rather than opt in. From that perspective, Barack Obama's proposal to let citizens break into their 401(k)s is a step in the wrong direction.
But it will take more than white papers and wonkery to change social norms. So what forces in today's society could be harnessed to make economizing admirable? A couple seem promising.
One is environmentalism: The mantra of "reduce, reuse, recycle" is a formula for saving money, while wasting resources not only is personally profligate but also harms everyone by hurting the planet. In Hollywood a Prius is far hipper than a Hummer.
Another force might be retirement anxiety: If you don't save enough to pay all your own bills, then you're forcing your kids and mine to pay them, and that's not right.
It's far from certain that focusing on any of this would work. The famous Harvard sociologist (and former Fortune staffer) Daniel Bell contended in The Cultural Contradictions of Capitalism that something like the current mess was predictable; capitalism depends on diligent hard work but also on the promotion of hedonism and self-gratification to keep people spending, which eventually must corrode the ethic of self-sacrifice. The story, he felt, cannot end happily.
I'm not ready to give up on thrift just yet, because I suspect Americans are finally ready to embrace thrift today for a better tomorrow. If we do, and even if that causes a temporary hit to economic growth, I'm certain that we will be happier, saner, calmer, and ultimately much better off
By Geoff Colvin, senior editor at large

Real Estate

By Stephen Gandel and Paul J. Lim
The global contagion has spread, but the source of the crisis is still bleeding. From struggling homeowners who can't make their payments to would-be buyers, almost everyone is wondering where home prices are heading next. Here's some insight.
Is there any hope for home prices?
The burst real estate bubble that kicked off this crisis is unlikely to reinflate quickly. "I don't see the slump in housing prices ending anytime soon," says Dean Baker, co-director of the Center for Economic Policy and Research. The government takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly (which helps buyers afford your home).
But the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. And that has pushed home-loan rates right back up.
The proposed government bailout could help home prices if the banks that get relief turn around and make new loans, but it's not clear that they will. More important, housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have left 4-million-plus homes on the market, nearly half a million more than two years ago. That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory.
"In the long run none of what we're doing now is going to matter that much to real estate," says Wellesley economics professor Karl Case. "Home prices have to do with the scarcity of land and perception of that scarcity."
Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller. Most economists expect another 10% drop in housing prices nationally over the next year. Some, like Nouriel Roubini of New York University, say a 15% to 20% drop is more likely.