The hum of ambient noise in Midtown Manhattan is several decibels lower than it was a year ago. Fewer black Town Cars idle outside the investment bank offices on Park Avenue. The aisles of the flagship Saks Fifth Avenue are so quiet, you'd think you were in a library. The restaurants and shops at Rockefeller Center are open as usual, but they seem oddly depopulated. Where are all the tourists and office workers, the hordes of junior analysts lining up in Starbucks?
Something less tangible is also absent: the spirit of caffeinated, heedless risk-taking. For the last few years, risk has been the adrenaline of the nation's economy, the substance that made us all—from the denizens of Midtown Manhattan to the residents of Manhattan, Kan.—run a little faster and stay up a little later. Now, with the economy in its 16th month of recession and the markets scythed in half, it seems we've all either switched to decaf or simply lost the taste for risk.
In the grips of a bubble mentality, we—as investors, consumers, and businesses—blithely assumed risk and convinced ourselves it was perfectly safe to do so. We bought houses with no money down, took on huge amounts of debt, and let the booming stock and housing markets perform the heavy lifting of saving. After all, new technologies, securitization, and derivatives supposedly permitted financial wizards to slice, dice, sell—and, ultimately, banish—any type of risk. But the intellectual scaffolding surrounding that culture of debt and risk has fallen along with the stocks of Citigroup and AIG. And now the zeitgeist has spun 180 degrees. Squeeze your nickels, slash debt, stop gambling. In January, Nevada's casinos reported gamblers lost 14.6 percent less money than they did in January 2008.
"The precautionary behavior of every entity in the global economy has gone up," said Mohamed El-Arian, CEO of the giant bond investment fund PIMCO. "We've gone from an age of entitlement to an age of thrift."
Call it a flight to safety, a rush from risk, the new sobriety.
"People have run with their money to banks that they think are still healthy," said Ronald Hermance, CEO of Hudson City Bancorp, where deposits have soared by nearly one-third since the beginning of 2008.
In January, Americans saved 5 percent of disposable personal income, up from 0.4 percent in the fourth quarter of 2007—and our newfound desire to squirrel away cash seems likely to continue. When pollster Scott Rasmussen asked investors what they'd do with new money in February, 32 percent said they'd save it and only 16 percent said they'd invest in stocks. Even though they offer virtually no returns, money-market mutual funds, now guaranteed by the federal government, have attracted $3.8 trillion, up from $3.4 trillion a year ago. The global rush for U.S. government bonds, the world's safest and most liquid investments, has pushed rates so far down—the 10-year bond yields just 2.9 percent—that investor (and Washington Post Co. board member) Warren Buffett has warned of a "U.S. Treasury bond bubble."
While sales of safes and guns are on the rise, venture capitalists, the ultimate risk-takers, are pulling in their horns. "We're hunkering down and conserving cash in our fund and in our companies," said Carol Winslow, founding partner of Chicago-based Channel Medical Partners, which hasn't made an investment since 2007.
Last year, Delaware, the preferred home for the registration of new firms, saw new incorporations drop by 25 percent. The rush to hoard cash and pinch pennies is understandable, given that about $13 trillion in household net worth evaporated between mid-2007 and the end of 2008. But while it makes complete microeconomic sense for families and individual businesses, the spending freeze and collective shunning of nonguaranteed investments is macroeconomically troubling. Especially if it persists once the credit crisis passes.
For the economy to recover and thrive, hoarders must open their wallets and become consumers, business must once again be willing to roll the dice. Nobody is advocating a return to the debt-fueled days of 4,000-square-foot second homes, $1,000 handbags, and $6 specialty coffees. But in our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend. Otherwise we fall into what economist John Maynard Keynes called the "paradox of thrift." If everyone saves during a slack period, economic activity will decrease, thus making everyone poorer.
We also need to start investing again—not necessarily in the stocks of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovery and development of new technologies.
Is this era of thrift a temporary phenomenon? Will we revert to our risk-taking selves as soon as we latch onto the next New, New Thing? Those are the $14 trillion questions. Earlier this decade, we transitioned effortlessly from the dot-com bubble to a housing and credit bubble, which suggests a powerful resiliency. But financial trauma can leave deep scar tissue, as it did after the Great Depression. It took the Dow 25 years to return to its 1929 peak. And much to the chagrin of Charles Merrill, the pioneering stockbroker who worked tirelessly to democratize stock ownership, it took much longer to convince middle-class Americans that stocks were safe.
In 1952, a Brookings Institution survey found that while 82 percent of families had life insurance, just 4.2 percent owned stocks. People who were young in the 1930s developed a set of attitudes toward money and risk that they carried with them throughout their lives. A relative of mine who came of age in the Depression built several successful businesses. When he sold them and retired in the early 1980s, he refused to hold anything other than Treasury bonds.
It's tempting in this period of contraction to mimic Thoreau, to live simply and deliberately. But if we lose our penchant for gain and risk, we'll lose some of the essence of what makes us American. In his book The Hypomanic Edge, psychologist John Gartner argues convincingly that over the centuries, the American population, continually infused with immigrants, has self-selected for hypomania—a tendency to action, an appetite for risk, an endless belief in human possibilities. While the 1990s were "a perfect storm of economic hypomania," Gartner says, "today the mood is anything but hypomanic."
Economists warn that if we don't manage to jolt the economy back into life soon, we run the risk of repeating Japan's so-called "lost decade" of the 1990s. Would that be so bad? After all, while Japan endured a prolonged period of slow growth, nobody starved, there was no social unrest in the aging country, and its biggest companies continued to innovate. But America is different. Thanks to our continually rising population, we need significant growth just to maintain our standards of living—and the health of our democracy.