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.
"When people experience progress in their material living standards and they have some degree of optimism that it will continue, they're inclined to support public policies that reflect tolerance, opening of opportunity, and commitments to democracy," said Benjamin Friedman, a Harvard economist and author of The Moral Consequences of Growth.
A second moral imperative demands that America get back on the growth track. The United States remains the single largest source of demand. Until America emerges from its bunker, the global economy—facing its first year of contraction since World War II—is likely to remain moribund.
Saving cash and building up reserves is a necessary first step to recovery. But eventually the mountain of cash has to be put to work. Last week's sharp market rally was certainly a sign—however fleeting it may turn out to be—that investors are putting money to work again.
But there's much more work to be done. Ironically, post-bubble periods are frequently great times to start new ventures. The best time to start a dot-com wasn't in 1999 when the IPO market was raging; it was in 2002, when the price of everything associated with the business—office space, programming talent—had plummeted. When Allied Corp. in the late 1980s didn't want to pursue the development of consumer products based on global positioning satellite technology, Gary Burrell left, raised $4 million, and formed Garmin, which today employs about 7,000 people.
But investing during slack times requires a leap of faith. Thomas Watson, CEO of IBM, ramped up R&D spending every year from 1931-35. "His board of directors thought he was nuts," said Harvard Business School historian Nancy Koehn. But when the Social Security system was rolled out later in the decade, only IBM could handle the data-processing requirements. Both Southwest Airlines and Federal Express were founded in 1971 and took flight in a period when stagnant growth and soaring energy costs conspired against transportation companies.
"Recession-Plagued Nation Demands New Bubble to Invest in," ran a headline from the satirical magazine the Onion. But the antidote to a spell of mindless debt, spending, and investment isn't necessarily another binge of mindless debt, spending, and investment. Risk today has a bad name, in part because so much of the capital put at risk in the past several years was done so in vain. Much of the debt created didn't finance business or dreams (unless your dreams consisted of flat-screen televisions). Rather, it was simply debt layered on top of debt for the purpose of generating fees and trading profits.
Between 1996 and 2007, according to the Kauffman Foundation, about 0.3 percent of the adult population started a new business each month, or about 495,000 per month. There's no reason to think such entrepreneurial activity will decline in this recession, although there are some barriers. In recent years, many new businesses have been financed through retirement savings, second mortgages, and credit-card debt. None of those three sources of funding is particularly deep now.
Even so, layoffs can prove a powerful spur to entrepreneurship. Last October, Susan Durrett was laid off from her job at a San Francisco-based architecture firm whose business designing large resorts and condominium projects had dried up. "Starting my own business was actually my best alternative," she said. Reasoning that people might be forswearing major remodeling projects for smaller ones, she started her own firm, Susan Durrett Landscape Architecture, and now has four projects in the works. Durrett touts growth areas, such as green roofs, edible gardens, and sustainable design.
The new ethos of thrift, which is as much about efficiency and sustainability as it is about penny-pinching, may have significant commercial applications beyond green roofs. Venture capitalists are seeding startups in wind power and smart-grid technology. Small enterprises that install solar panels and conduct energy audits are expanding. They, and other businesses, will benefit from measures in the recently passed stimulus package to weatherize homes and make government buildings more energy efficient.
Of course, there's more the government can do. To name one example: An affordable national health care policy, which could allow people to quit their jobs and launch businesses without worrying about the crippling costs of premiums or medical costs, might be a better spur to risk-taking than targeted small-business loans.
The markets, and the economy as a whole, are continually buffeted by the twin forces of fear and greed. For the past year, fear has clearly had the upper hand. But over time, as fear subsides, our inborn instincts to improve our lot and desire for gains, and greed—Adam Smith would call it self-interest—will make a comeback. In the meantime, it wouldn't hurt for some of our most successful risk takers to step up.
The recently published Forbes list shows there are easily more than 300 American billionaires. And while their net worths have suffered, they still have the means to provide the risk capital that is now in short supply. That's what the nation's wealthiest family did during the Great Depression. In 1931, in the depths of the Depression, John D. Rockefeller Jr., who had spent his life giving away his father's fortune, embarked upon a massive, private stimulus program: the construction of Rockefeller Center. The project, the only major development in New York between 1931 and 1946, employed about 75,000 people, from stone-cutters in granite quarries to artists, architects, and welders. "It showed a great deal of confidence," says Daniel Okrent, author of the definitive book on Rockefeller Center, Great Fortune. Conceived as a sort of philanthropic, private-sector public works project, Rockefeller Center turned out to be a home run as an investment—and still supports thousands of private-sector jobs.
Newsweek's Daniel Stone, Nick Summers, and Jessica Ramirez contributed to this story. A version of this article appears in this week's Newsweek.
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