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Released: October 21, 2008

A return to thrift

Source: Geoff Colvin, Washington Post (Free Registration)

Sometimes it takes a near-death experience to change bad behavior. Think of your friend who quit smoking 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 assets to pay down debt, but most people 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 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. Debt got us into this mess. Blaming 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.

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