Friday, February 06, 2009

The Great Reset

Carl at the Behavior Gap articulates some sentiments I've had for a while now. There's an obvious disconnect between Americans' suddenly renewed interest in saving and the negative economic impact of that behavior on a wide scale. We should want people to save and not be profligate spenders. In fact, one could argue that the fake economy we had built, propped up essentially with loans that would never be paid back repackaged and sold to other parties who also wouldn't be reimbursed, was a direct product of our profligacy, our flouting of the old virtues of saving and living within our means (along with bankers' flouting of their old ethical code of safeguarding the financial well-being of their clients). We built an economy of debt to supplement our economy of goods and services.

The problem is not that people aren't spending as much. That is a good thing. People who save more have sturdier financial fortitude in times of hardship; they are less likely to need help, and more likely to be able to help others cope. The more people save for retirement, the less dependent they are on government services like Social Security and Medicare. People who are good savers and know how to live within their means don't have to cut their spending so dramatically in bad times, and don't go hog wild in good times, blowing their cash on stuff they can't afford in the long run. Saving is good.

I would also argue that the problem is not that housing prices are falling or that mortgage-backed securities are losing value. Their values are falling because they were too high.

The problems right now are unemployment and the credit crunch, which is keeping businesses away from that crucial lifeline and preventing even consumers who are spending wisely from getting the money for high-dollar investments, like a home or a car. These are combined with the perennial problems of underemployment, consumer debt, and an exorbitant and litigious health care system. Our problem, in a nutshell, is that we created an economy where one of the primary engines was debt masked as wealth. A sound economic plan is one that does not try to re-inflate the bubble of deficit spending, but rather one that supports a real economy of money and goods and services.

I vote for an economic plan that doesn't have "everybody go to the mall" as one of its primary steps.

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