Can Europe Help Brits and Americans Control Debt?

By rights, the careless consumers of the developed world should be in a chastened mood. After all, it was their binge spending on houses and consumer goods—fueled by credit and mortgages from recklessly indulgent banks—that helped bring the world to the brink of financial disaster back in 2008. Americans and the British, in particular, were done in by their free-spending ways. For years, Americans had been saving only 2 or 3 percent of their income, compared with 10 percent or more in European and Asian countries. The British, in turn, amassed even larger amounts of personal debt. By 2008, average household debt had reached 183 percent of annual disposable income, the highest level of any major economy.

So have the spendthrifts now seen the error of their ways? Don't be too sure. Initial signs were that a new frugality was taking hold. Overindebted consumers would have to pay off debt and rebuild their depleted savings, leading to a new era of thrift in the formerly profligate countries. Indeed, there has been an upturn in savings in both Britain and America. The U.S. personal saving rate more than tripled from 2 percent in 2007 to 7 percent in the second quarter of 2009, before dropping back to 5.5 percent, where it has hovered now for a while. In Britain the rate is falling again and came down to a measly 3.2 percent in the second quarter of 2010.

Another sign of new, thriftier habits is the fact that many Americans are turning their backs on credit cards. At the height of the credit bubble and housing boom in 2007, 87 percent of Americans used credit cards. That figure dropped to 56 percent in 2009 and was projected to sink below 50 percent by the end of 2010, according to a report by Javelin Strategy & Research. Meanwhile, more and more cautious consumers are opting for prepaid debit cards, which don't accumulate debt. Debit-card use has skyrocketed, from a total transaction volume of $32 billion in 2007 to $80 billion by the end of 2010, according to data by the Network Branded Prepaid Card Association.

But look closer at these numbers, too, and it seems old habits die hard. Yes, Americans have pared back their personal debt. In the third quarter of 2010 alone household debt fell $110 billion, or almost 1 percent. The total has dropped more than 6 percent since its peak in 2008. But skeptics point out that much of the overall decline has come as a result of home foreclosures and defaults on credit-card debt, hardly an indicator of improved habits of personal finance. "I would love to be able to say that we have learned lessons and will be thriftier going forward, but I don't feel we have," says Karen Dynan, an economist at the Brookings Institution in Washington. "That isn't to say it can't be true—but we just don't know at this point." She also says that the statistics fail to show who, exactly, is doing the increased saving. In America, more than in other developed countries, it's the richer households that can afford to save, while the poor get mired in debt.

The truth may be that the spending urge is hard to contain. Entire generations of consumers have grown up with the idea of instant consumer gratification and the credit culture that comes with it. The seemingly perpetual ascent of real-estate and stock prices in the long boom before the crisis created rising wealth without the hard work of having to save. "People got used to accumulating wealth without doing much, and that makes for habits that are hard to break," says Dynan. Some even argue that there's something in American or British culture that makes people forever spendthrift and happy to live on debt. Jacques Monin, an author and commentator, says that attitudes toward debt are rooted in history and deep-seated national attitudes. "America is a country built on taking risks," he says. "France isn't. There is a long tradition in France that you only spend what you have in your wallet, and if you have extra money, you stow it away."

That kind of cultural explanation has become popular, but it doesn't go very far. Carmen Reinhart, a University of Maryland economist who has studied the debt history of many different countries, says habits of spending, saving, and going into debt have little to do with national traits. It's not moral turpitude that breeds profligacy, she says, but easy access to credit. Take the notorious home-equity loan: a widespread practice among American families was to borrow against the market value of their homes to finance everyday purchases. Many of them are now deeply in debt as the value of their homes has plunged. That practice is rare outside the United States. On mortgages, continental banks are much stricter, usually capping the amount that can be borrowed at 85 percent of the value of the home, versus more than 100 percent at many U.S. banks. French banks won't lend to a would-be homeowner if the monthly mortgage payment exceeds one third of her monthly income.

It's loose controls in financial services—both by banks and by regulators—that inevitably lead to higher borrowing, says Reinhart: "The common feature of financial liberalization everywhere is that credit becomes more readily available to households." Saving habits follow a similar logic. "People love to make moral judgments, but in countries where there is less access to credit, consumers save more because they need the money to buy the things that they want," says Steve Blitz, chief economist at ITG Research in New York. In other words, it's not a return to sobriety and rectitude that will keep the credit-crazed out of the red. A tougher line on lending just might do the trick.

With Jerry Guo in New York