Editor’s note: What wealth effect? A lesson from the Great Recession

During the run-up in the real estate boom, I used to hear a lot about the wealth effect, the idea that if we all just feel richer we will spend more. The economy floated along on feel-good perceptions for quite some time. There was a sense that our homes would almost certainly be worth more tomorrow, so why not cash in today?

We all saw how that turned out.

The experience taught me why many of those touched by the real Depression held on so tight to their money, even when times improved. They had learned the hard way that what goes up can also go down.

So it is with some curiosity that I watch the stock market’s recent rise. My 401K, which once seemed like such a lost cause, looks much healthier these days. Home values in my neighborhood, while not back where they once were, are at least heading in the right direction, and the houses that come on the market don’t stay there long.

In other words, I should feel wealthier. But I don’t.

Even though I know I can get credit, borrowing leaves me with a sense of foreboding, like the rug can be pulled out at any moment.

Apparently, I’m not alone, judging by this week’s cover story.

Staff writer Abha Bhattarai takes a look at what the market’s run has meant for the region’s largest public companies. Many are steering a conservative course, unsure whether happy days are indeed here again.

There’s plenty of reasons to be wary. The national economy is still being propped up by the Fed’s liberal lending practices. Washington shows little sign of compromising on budget priorities. Global uncertainties continue to percolate.

It’s not surprising then that many want to hold a little more cash in reserve, just in case. Their caution suggests that the nation’s slow recovery is going to plod along a bit while longer.

Call it a lesson from the Great Recession.

Why spend today, when you can do it tomorrow?

Dan Beyers is the founding editor of Capital Business, The Washington Post’s go-to source for news about the region’s business community.



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