Less Debt, Less Borrowing, More Saving – Good for the Market

by Laura Ehrenberg-Chesler on March 31, 2009

in Credit Crisis,Debt

Today’s post is an expansion of my column that ran in today’s San Antonio “Express-News.”  Each month, you’ll find my partner, Marilou Long, and me sharing our viewpoints in the business section of the paper.  We hope you’ll follow us both in print and online.  Your comments and conversation, are of course, welcome.

I find very interesting the school of thought that advocates borrowing money as a solution to the problem of too much debt.

Our current economic challenges were brought on by what some seem to be proposing as a cure – more borrowing. While a smooth functioning credit market is necessary to promote economic activity, an increase in the personal savings rate, and paying down debt, can ultimately be good for the stock and bond markets.

A sound individual balance sheet, coupled with a healthy combination of saving, and measured spending, will put more money to work in the markets and it will increase deposits in our banks. This will enable us to have more stable  underpinnings for the domestic and global economy.  Less spending and borrowing may be a painful adjustment for some in the short term.  However,  as personal finances move to a more stable footing, the individuals’ ability to absorb unanticipated setbacks increases.   Therefore, the impact of financial cycles, and employment cycles will be more muted. 

The perfect place to start will be with  mortgage rates as they move lower.  Loans must only be made to qualified borrowers.  Owning a home is not an entitlement, and should be viewed as a right that must be earned.   The individual must let go of the mentality  ” I want it now, therefore I must have it now”.  I think it is a good sign that consumer spending has slowed, and some redundant retail stores will go away.

The collective will to have a more balanced outlook in terms of spending, saving and conserving resources, which I currently see emerging, will stand us all in good stead in the years to come.

Here are some related stories you might find of interest:

* Wolfgang Münchau of the Financial Times writes that yes, it’s really OK for banks to contract on their lending practices.  We at Crossvault believe this is an appropriate response to the current economic conditions. 

*Additionally you can view a compilation of various economists’ views on consumption, the recession and the consumer here at The Wall Street Journal.



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