Stop Saving Now!

Is this era of thrift a temporary phenomenon? Will we revert to our risk- taking selves as soon as we latch on to the next New, New Thing? Those are the $14 trillion questions. Earlier this decade, we transitioned effortlessly from the dotcom 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."

Economists warn that if we don't manage to jolt the economy back to life soon, we run the risk of repeating Japan's "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," says 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 U.S. 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. Retail sales in February provided another hint that purse strings may be loosening. 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 dotcom 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 to 1935. "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 of stagnant growth and soaring energy costs. NEWSWEEK was founded in 1933, one of the worst years on record for print advertising.

IT'S POSSIBLE THAT ALL WE NEED is another bout of enthusiasm to jolt the nation out of its torpor. 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 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.