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.
"There's not a broader credit crunch going on in the economy," he says. But "I wouldn't say that we're out of the woods yet."
The problem: Bad news tied to the housing market may not be over – and could make the debt workout tougher on banks and consumers.
In the recent housing boom, homeowners generally saw the value of their dwellings rise, but they took on a lot of debt in the process.
Rising home prices pushed up their net worth. But consider the debt side of the ledger alone: Borrowed funds now equal 138 percent of annual household income, according to Federal Reserve data tracked by the investment firm Merrill Lynch.
Until 1990, this figure usually stood below 80 percent.
"Excessive debt is a problem that encompassed the full spectrum of households," David Rosenberg, chief economist at Merrill Lynch, writes in a recent report. Now, thanks to the housing downturn, "we are at the early stages of savings revival," he says.
A higher savings rate not only will help consumers repair their household balance sheets, but it also helps the whole economy, some analysts say, because the nation then has to borrow less money from abroad to invest in new jobs and equipment.
The downside, however, is less money for consumer spending.
That was visible during this holiday shopping season. Retail spending rose but at a slower rate – and much of it was financed by a fling with credit cards that may not be sustainable in the new year.
On Tuesday, MasterCard Advisors reported that US holiday sales were 3.6 percent higher than in 2006, a more tepid gain than the 6.6 percent rise the year before.
As holiday spending began in November, the personal savings rate turned negative. But with home prices no longer rising and banks tightening up on their willingness to lend, economists say that return to positive savings is likely.
The good news is that, on average, households have more assets than debts – a positive net worth.
But signs of borrower stress go beyond subprime home loans. About 4.5 percent of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9 percent the previous month, according to a Lehman Brothers survey cited by the Associated Press. Credit-card loan losses are also rising.