The Big Bank Bailout: Are You Next?

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One possible benefit of turmoil: the bear market of 2008 may have ended the spendthrift ways of the 80 million--strong boomer generation, which is now heading rapidly toward retirement, and refocused them on saving. "We must have a reset on consumer spending; frankly, it is out of control," says Daniel J. Houston, president of retirement investor services at Principal Financial Group in Des Moines, Iowa. The average contribution to a 401(k) plan is 7% of salary, yet the average person may need to save 13% to 15% of his salary to maintain his standard of living in retirement. For people 10 years from retirement, "this might be the best wake-up call we ever got," says Houston.

If we are forced to increase savings, then spending has to drop, and that has ramifications for the stock market and the economy, because it implies we'll buy fewer computers and take fewer trips. With consumers hard-pressed, it is the government that will have to do the spending, says McManus. "Now is the time for us to spend, spend, spend, to make sure people are employed and have money on the table." Both presidential candidates have proposed economic-stimulus packages on top of the $168 billion stimulus Congress passed in early February. At some point, of course, the next President will have to either rein in that spending or raise taxes--or risk a historic budget deficit.

As for the stock market, you have to think of it as a forecaster. The market looked into the future and saw a horizon darkened by a complete collapse of lending and the prospect of a long, deep recession. So Paulson and Bernanke changed course, as have some investors. "We can always adjust our retirement plan by a couple of years just to ride this out," says Linda Gallegos, 54, of Golden, Colo. She and her husband Gary have two 401(k)s. "I've been thinking, Oh, my God, this could be bad. But I feel pretty powerless to do anything. I figure, what goes down will come back up. Maybe we've seen the worst of it." Maybe. The fate of the economy could depend on how many Americans are willing to bet on it.