The Washington Post

Sunpay, OcroBER 7, 2007

A THRIFTY IDEA

Forget Easy Money. Try Saving a Few Bucks.

By Ray Bosnana and Pun.ire Loncman

ountrywide Financial, the nation’s largest

mortgage lender, has a curious new idea — or,

more precisely, an old one. No longer will it use

wads of Chinese cash recycled through Wall
Street to make subprime loans to unqualified borrowers.
Instead, it will take in deposits from small savers and
lend them out to people who might actually repay them
— just like that humble thrift institution president
George Bailey did in “It’s a Wonderful Life.”

Imagine: a bank that promotes thrift! This could be
the start of something big. Writing recently in the
American Banker, Eugene Ludwig, a former comptroller
of the currency, advised financial institutions to stop
relying “on the easy money that comes from wholesale
funding” and to concentrate instead “on harder-to-get
core deposits.” How quaint. Remember when banks
actually tried to instill the savings habit by going into
schools and helping kids set up small passbook
accounts? Today, the first experience most younger
Americans have with a bank comes during freshman
orientation at college, when they come across a table
laden with giveaways and credit-card applications.

This return to thrift comes none too soon. Not since
the Great Depression have so many Americans lost their
homes in one year — and we're not even in a recession,
at least not yet. But we're still on course to see 2 million
foreclosures in 2007, afflicting one in 62 households.
That's a 67 percent increase from 2006, according to
RealtyTrac. The Federal Reserve's recent decision to cut
its benchmark rate by half a point, while widely praised
on Wall Street, will do little to stop the slide.

Also not since the Great Depression have Americans
saved so little. Even with unemployment at historically
low levels, Americans spent more than they eamed in
both 2005 and 2006 — and charged the difference.
Household debt, not including mortgages, now eats up

Ray Boshara is vice president of the New America
Foundation and Phillip Longman is its Schwarz
senior fellow. They are writing a book on thrift and
the American middle class.

nearly 15 percent of disposable income — more than
food and gasoline combined. One in seven families is
dealing with a debt collector. Children today are more
likely to live through their parents’ bankruptcy than
their parents’ divorce. Americans’ stunning lack of
savings not only brings personal tragedy but also is
causing the dollar to plummet against ail major
currencies, jeopardizing our economic growth and
threatening the financial system worldwide,

What's going on? No doubt, some of us like to shop
too much, but it’s also true that the “fixed costs” of
middle-class life have soared. Elizabeth Warren, a
professor at Harvard Law School, shows that while
family incomes have gone up in the past generation, the
costs of health care, education, housing, child care and
transportation have risen even higher.

Meanwhile, not only does the government itself
borrow as though there were no tomorrow, primarily
through unfunded health and pension plans, but it
promotes what David Blankenhorn of the Institute for
American Values calls “anti-thrift” institutions. Today,
41 states plus the District of Columbia and Puerto Rico
run lotteries, and 11 states encourage casinos.
Government has also allowed for the mainstreaming of
other anti-thrift institutions — some charging annual
interest of more than 500 percent — that once existed,
ifat all, only in the shadows of society. Payday lenders,
rent-to-own stores, auto-title lenders, some franchise tax
preparers and chain pawn shops are all now as common
across the landscape of middle-class America as
Applebee's.

After the terrorist attacks of 2001, President Bush
told us that the patriotic thing to do was to shop. But
Osama bin Laden is still out there, gas is more
expensive than ever, the credit card is maxed out and
our homes are depreciating. There's a better way: the
old-fashioned virtue called thrift.

Historically, thrift didn’t carry its current association
of being cheap or stingy. Rather, it meant the wise use of
resources. It meant an abhorrence of waste, whether of

raw materials, time, energy or money. In short, it meant
conservation.

To conserve money, working-class men and women
banded together to create “thrift” institutions, Before
these institutions were deregulated and taken over by
the fast-buck crowd in the 1980s, they provided a staid
but reliable vehicle for building a nation of “frecholding”
middleclass homeowners and small-scale
entrepreneurs, Most Americans understood, until the
triumph of the antithrift institutions, that their own
freedom from wage slavery — and, indeed, the civic
health and wealth of the republic — depended on the
savings habit and the widespread ownership of
unencumbered small properties that it makes possible.

‘Today, by contrast, while many Americans
understand the need to conserve energy and natural
resources, they have trouble seeing what any of that has
to do with credit cards and subprime mortgages. But
conserving financial resources is not only still essential
to individual liberty; itis also essential to moderating
wasteful consumption and saving the environment,

Reviving the American thrift ethos won't be easy, and
it will probably take at least a generation. But we can
take some small steps now that would make saving easy,
automatic and frequent. Our goal should be to generate
new savers as well as new savings — in sharp contrast
to current government policy, which allocates
considerably more than $100 billion a year in tax breaks
to high-income earners who would save anyway.

First, we should take advantage of one of the most
powerful forces in human nature: inertia. Studies in
behavioral economics show that when new hires have to
opt out of a 401(k) retirement plan, as opposed to
having to opt én, savings rates skyrocket. Also, building
on the “Opportunity NYC” initiative (which is being
privately funded by the Rockefeller Foundation, New
York Mayor Michael R. Bloomberg and several other
donors), governments, civieminded corporations and
philanthropies could make automatic savings deposits
to individuals who engage in socially desirable behavior.

Finish high school, volunteer in your community or buy
an energy-efficient appliance, and your savings account
receives a deposit.

Technology, if fully exploited, can also make the cost
of maintaining a bank account far lower, thereby giving
financial institutions a greater incentive to serve small
savers and giving freedom to the “unbanked” poor from
the gouging fees that payday lenders charge to cash
checks. Imagine that your debit card is also an
interest-paying savings card, to which your employer,
the Internal Revenue Service and other entities can
make automatic deposits. Some innovative firms are
alréady offering such a product, which combines low
cost with convenience and security.

Meanwhile, regulators should encourage more
community-focused banks, credit unions and thrift
institutions. These can resume their historical role of
promoting thrift by helping customers become savers as.
well as (eventually) homeowners and small-business
‘owners.

Congress should do its part as well. The bipartisan
‘New Savers Act, for example, makes it easier to open
bank accounts, buy savings bonds, put money away for
college and receive financial education. Another
bipartisan measure, the Automatic IRA Act, encourages
automatic payroll deposits into JRAs. Other proposals
authorize tax credits for low-income savers, as well as
remove savings penalties for those on public assistance.

Finally, to usher in this “new thrift” across
generations, Congress should establish a lifelong savings
account for all children when they are born — a reality
in Britain and elsewhere and an idea that’s rapidly
gaining bipartisan momentum in the United States.

Ifyou're an American born in the 20th century, thrift
probably strikes you as a musty, downscale word —
reminiscent of used clothes, aged relatives who wrapped.
their sofas in plastic or perhaps the grandmother who
saved Green Stamps. But it’s worth remembering, as did
generations of Americans struggling up from poverty
and privation, that thrift is still the essential virtue that
makes the American dream possible.

boshara@newamerica.net
longman@newamerica.net