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New era of austerity for U.S. borrowers?

Record levels of debt and falling home prices may mean Americans will now spend less, save more.

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After years when credit came easy, 2007 may mark a fundamental shift for the US economy: Both borrowers and lenders are in "workout" mode, coming to terms with past excesses.

So far, the problems for banks haven't caused a credit crunch, a broad pullback of lending.

But the effects appear significant enough to suggest, possibly, a new era of austerity.

Among the signs:

•The national savings rate – what's left after consumer spending is subtracted from disposable income – no longer defies economic gravity. The savings rate had been negative for a time, but for most months in 2007 it has been positive, and some economists expect it will continue rising.

•Banks' top priority now is raising capital – reserve money needed as a cushion against rising loan losses. This has led to some surprising partnerships in recent days, with US banks welcoming new cash from so-called sovereign wealth funds – national investment funds of nations such as China, Singapore, and the United Arab Emirates.

•For policymakers, a top concern now is how to keep America's economy from slowing so far that it contracts in a recession. The Federal Reserve, usually focused most keenly on the threat of inflation, has been cutting interest rates with one eye on the threat of deflation – at least in the price of homes.

"The credit cycle has turned," says Jay Bryson, an economist at Wachovia Corp., a large bank and investment firm based in Charlotte, N.C. "I don't worry about the [world's] central banks overstimulating things right now."

In some ways, he says, this turning of the credit cycle is healthy for the economy. The credit boom, which fueled a record run-up in home prices since 2001, created an atmosphere in which borrowers and lenders paid too little attention to risk. Both sides focused on expected gains in the prices of assets such as homes.

Now, with home prices declining, a more realistic appraisal of risk is back in vogue.

This is affecting the lending climate beyond housing, but the general flow of money has not been severely squeezed. Companies with high credit quality can still finance themselves by issuing bonds, for example. And this helps Mr. Bryson maintain a forecast of no recession for the United States in 2008.

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