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Why Americans Became More Responsible About Spending Money

Alan Greenspan stood before Congress a decade ago and complained that "Children, dogs, cats and moose are getting credit cards." That's how America used to work. You didn't need a job or an income to spend money. If you had a will to spend, someone -- usually a bank -- found a way.

But things have changed. According to Bloomberg, the correlation between Americans' wages and their spending is the highest it's been in almost half a century. "This means consumers are keeping their spending more in line with their incomes," Bloomberg writes. Congratulations!

But there's another point here: The amount of money Americans are saving is still puny. The personal savings rate has averaged 3.7% over the last year, compared with a long-term average of 7% and a 30-year average of more than 5%.

Can we really say Americans are being responsible about their spending when they're saving so little money?

Yes, actually.

Americans may be saving less money today than in the past because we have a larger safety net. And I'm not talking about unemployment insurance or Social Security. I'm talking about bankruptcy.

Take a look at this:

Source: Federal Reserve.

Bankruptcies per 1,000 people have utterly exploded in the last 50 years. That's partly because we have more debt today than we did back then, but bankruptcies have also increased because:

  • Laws have loosened. Personal bankruptcy used to spell nothing less than the complete ruin of someone's financial well-being. The Chandler Act of 1938, and to a larger extent the Bankruptcy Reform Act of 1978, expanded bankruptcy laws in favor of debtors, making bankruptcy filings more appealing.
  • Attitudes about bankruptcy changed. As law professor Rafael Efrat explains in this paper, the stigma behind filing for bankruptcy shifted noticeably around the 1960s. "By shifting attribution of fault away from the financially troubled individual, American society may have developed a more positive attitude toward the individual that was manifested by less anger and more sympathy with the plight of the individual," he writes.

Americans don't need to save as much as they did in the past because the escape hatch of bankruptcy is now more user-friendly and accessible. Occupy Wall Street laid blame on the credit practices of consumer-centric banks Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) , but credit is a two-way street: Banks supply credit products that consumers demand. And consumers may demand those credit products more today than they did in the past because the downside consequences have been mitigated through changes in the personal bankruptcy process.

What do you think: Is this moral hazard? Are we encouraging risky behavior or providing a vital safety net for consumers? Let me know in the comment section below. 

Read/Post Comments (10) | Recommend This Article (15)

Comments from our Foolish Readers

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  • Report this Comment On July 24, 2013, at 2:37 PM, artemis021 wrote:

    Most bankruptcies aren't from credit card debt or from buying people buying McMansions they couldn't afford; they're from medical debt.

    Bankruptcy is not a "safety net." It might erase the debt you owe Chase, but it give you money for food. It won't cover your rent. It won't give you money to get your car fixed.

    Maybe Americans are spending less because we saw a massive drop in market value in stocks in 2008 and that scared a lot of people off. Or because banks are paying .01% interest on savings accounts.

  • Report this Comment On July 24, 2013, at 2:59 PM, XMFGortok wrote:

    @artemis021 The interest rate banks pay is directly linked to the Federal Funds Rate (set by the Federal Reserve). In this case, the Federal Funds rate is hovering near zero percent. In real terms, it might as well be zero percent.

  • Report this Comment On July 24, 2013, at 3:30 PM, SubvertedNation wrote:

    Greenspan and the other bankers tricked everyone into thinking debt was money. Debt slavery is how they subdued nation after nation, and it's why they keep getting kicked out of said nations for thousands of years. Americans are getting more thrifty, because the bankers dried up all the credit, foreclosed on everyone's homes, repossessed their belongings, and left everyone squandering in poverty and debt. The bankers create money out of thin air, then loan it to you at interest. This is how they create debt slaves. Now the slaves can't afford anything, so they say we're spending more responsibly, while they live in luxury. What a joke.

  • Report this Comment On July 26, 2013, at 6:52 PM, neelvk wrote:

    Morgan - Do you seriously believe that people WANT to declare bankruptcy? Bankruptcies are up because people are broke!

  • Report this Comment On July 27, 2013, at 5:10 AM, maiday2000 wrote:

    I love how the title of this piece hints that Americans are becoming "more responsible" with money, but the reason behind it is because they declare bankruptcy more often.

    How far has the Fool devolved when

    Personal Responsibility = bankruptcy


  • Report this Comment On July 27, 2013, at 7:37 AM, Ziponline wrote:

    First,bankruptcy laws were made much stronger in favor of creditors within the last 10? years... And while certainly bankruptcy was a small relief valve, Its a far cry from a tool the average American keeps close in his wallet. Certainly it reflects how credit has been handed out like candy...

  • Report this Comment On July 27, 2013, at 9:47 AM, borneofan wrote:

    My perception is that folks are being more responsible with their money and use of credit. I see personal evidence of this, as well as the overall decline in credit card debt nationwide.

    Which is cause and which is effect? I won't speculate. But consumer behavior has changed. Folks no longer stand as close to the edge. They seem to hold a bit of cash and credit available for emergencies and unemployment.

    The moral hazard of "too big to fail" bank bailouts is far more dangerous than any moral hazard associated with individual bankruptcy. We don't have debtors prisons, so bankruptcy laws formalize a necessary process. Caveat lector applies to all prospective lenders. There is little risk of moral hazard.

    On the other hand, the housing market was loaded with individual moral hazard. Plenty of people borrowed more than the value of the house and spent it to zero. Without Fannie and Freddie to create and guarantee 30 year loans, and the fed to hold down interest rates, this would be economically impossible. And since the loan was secured by the property, neither the "homeowner" nor the "lender" had any skin in the game at all. Folks rightfully felt no obligation beyond mailing the keys to the lender and walking away. And the banks did not care since they were covered too. Thus the bubble...

  • Report this Comment On July 28, 2013, at 1:02 AM, enginear wrote:

    When people are scared, they save. The Chinese are incredible savers, like Americans were in the '50's... they both have personal memory of how bad it can really be (with the depression here, and the starvation of 'the great leap forward' followed by the cultural revolution in China).

    The last 5 or 6 years snapped back a lot of American heads that had be complacently inattentive for a long time. Its hard, but not all bad for people to know that life can be tough, even if you do (or want to) work hard, and play by the rules.

    It may be nice to know that you can file for bankruptcy, but I doubt if that makes people save less. The sense that life is precarious makes people worry about the unknown future.

  • Report this Comment On July 29, 2013, at 1:07 PM, Classof1964 wrote:

    In inflation adjusted dollars, about 80% of the population has not seen their real wages increase in the last thirty years. Prices have obviously risen as the real buying power of the dollar has eroded. Coupled with the realization that debt can be a crushing disaster, thanks to the near depression ushered in in 2008, it is not surprising that Americans are spending within their incomes and saving less. I would think that such factors would be much more significant than the fact that personal bankruptcy is easier for those 6 out of 1,000 people.

  • Report this Comment On August 15, 2013, at 2:04 PM, ddepperman wrote:

    Best set of comments I have seen EVER at TMF article!

    Only one threw some blame into the mix.

    Maybe Morgan Housel draws out smarter people than other Fools.


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