Tuesday, May 12, 2009

harder for smaller-capital companies and start-ups to obtain financing, and could lead to institutional advantages for incumbent, large-cap companies


May 11, 2009, 4:46 pm

Shift to Thrift: How Will Americans Save?

On Sunday I had an article about how many economists expect the days of zero or negative personal savings rates to be over, at least for a while.

While painful in the short run (since consumer spending makes up 70 percent of gross domestic product), a more lasting shift to saving could be good for the economy. More savings → more investment → more capital for American companies → greater economic growth → higher living standards.

This logic assumes, however, that Americans will be saving through financial institutions, rather than their mattresses. And even within financial institutions, their investment options are likely to evolve.

Historical research has found that people who live through a period of low stock market returns (and presumably declines, in the case of the last year) are less willing to invest in stocks, and instead prefer safer, lower-return investment alternatives like bonds. (Aside: On the other hand, people who lived through high-inflation periods tend to be wary of investing in long-term bonds.) More recent financial experiences also tend to have a stronger impact on these long-term attitudes toward investment decisions, according to the study’s authors, Ulrike Malmendier at the University of California, Berkeley, and Stefan Nagel at Stanford.

What does all this mean for near-term savings behavior?

“People are probably going to be thinking more along the lines of ‘How do I generate safe and secure retirement income?’ instead of ‘How do I amass the biggest balance in my account?’” said William Gale, director of both the economic studies program at Brookings Institution and the Retirement Security Project. Workers can invest their retirement savings in (among other things) stock funds, bond funds and annuities, and Mr. Gale expects there to be much more interest in the latter two categories.

Already it appears that financial institutions like Fidelity are developing more products for investors who “are seeking more conservative investment options.”

A shift to lower-risk saving opportunities may result in more secure retirement funds, but it has mixed implications for economic development.

“We may have lost a generation of investors,” said Joseph Brusuelas, a director at Moody’s Economy.com. “People may now look at the stock market as a losing proposition, as some sort of Wild West where the undeserving become rich, and those who play by the rules end up losing.”

This could make it harder for smaller-capital companies and start-ups to obtain financing, and could lead to institutional advantages for incumbent, large-capital companies, he said."

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