FORTUNE MAGAZINE Value Driven by Geoff Colvin
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A return to thrift

Main Street should follow Wall Street's example when it comes to deleveraging.

By Geoff Colvin, senior editor at large
October 30, 2008: 5:44 AM ET

(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.  To top of page

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