Comments on: Savings! Too Much of a Good Thing? http://www.policy-wonk.org/kent-gardner/savings-too-much-of-a-good-thing/ Let's talk about where we're headed... Wed, 01 Feb 2012 22:40:20 +0000 hourly 1 http://wordpress.org/?v=3.0.1 By: Kent Gardner http://www.policy-wonk.org/kent-gardner/savings-too-much-of-a-good-thing/comment-page-1/#comment-123 Kent Gardner Thu, 23 Oct 2008 14:18:05 +0000 http://live.cgr.org/policy-wonk/?p=180#comment-123 I completely agree, Steve. The global savings glut made all of the fancy footwork not only possible, but in some sense almost, shall I say, necessary? Certainly necessary to the fund managers sitting on piles of cash that weren't earning anything in the marketplace. Pushed by investors and competitors to earn higher returns, they took risks that were systemically unacceptable. And that's where we all got caught--behaviors that appeared to be acceptably risky from an individual's perspective had created systemic exposure to falling real estate prices. And we do find ourselves confronting that old "paradox of thrift"--saving is good for individuals but bad for the level of economic activity. I wonder, however, if this is a transitional problem. The rising savings rate will slow the economy initially but, once stablized at a higher level, will have the beneficial consequence of reducing interest rates, thus the cost of investment capital, thus spurring future economic growth. Any macroeconomists out there who can remind me of the net effect here? I completely agree, Steve. The global savings glut made all of the fancy footwork not only possible, but in some sense almost, shall I say, necessary? Certainly necessary to the fund managers sitting on piles of cash that weren’t earning anything in the marketplace. Pushed by investors and competitors to earn higher returns, they took risks that were systemically unacceptable. And that’s where we all got caught–behaviors that appeared to be acceptably risky from an individual’s perspective had created systemic exposure to falling real estate prices.

And we do find ourselves confronting that old “paradox of thrift”–saving is good for individuals but bad for the level of economic activity. I wonder, however, if this is a transitional problem. The rising savings rate will slow the economy initially but, once stablized at a higher level, will have the beneficial consequence of reducing interest rates, thus the cost of investment capital, thus spurring future economic growth. Any macroeconomists out there who can remind me of the net effect here?

]]> By: Steve Kroes http://www.policy-wonk.org/kent-gardner/savings-too-much-of-a-good-thing/comment-page-1/#comment-124 Steve Kroes Wed, 22 Oct 2008 19:20:10 +0000 http://live.cgr.org/policy-wonk/?p=180#comment-124 Kent, Thoughtful article. Two thoughts/questions: 1. The real estate bubble seems to have been fueled by a combination of low interest rates, lax lending standards in terms of borrower's credit scores, allowing no-money-down loans, interest-only loans, the securitization of mortgages, etc. Do you think all of those are a result of a global savings glut? Or are there other fundamental factors that led to those actions? 2. On savings, do you believe that Americans will begin saving much more of their incomes in the coming years than they have in recent years? I think it's Stephen Roach from Morgan Stanley who is predicting that consumption will fall from 71% of GDP to somewhere in the 60%+ range, more similar to a few decades ago. He argues that Americans were experimenting with allowing asset appreciation to replace their need for savings, but now that the bubble has burst, we'll return to saving from our incomes. If that's the case, it's probably a good thing for individuals, but could that be harmful for the economy as a whole by causing another savings glut or by causing consumption to grow slowly for a number of years? Personally, I can't help but think that more savings would be positive for America, but I suppose it's possible that a positive for individuals might be a negative for society. What do you think? Kent,

Thoughtful article. Two thoughts/questions:

1. The real estate bubble seems to have been fueled by a combination of low interest rates, lax lending standards in terms of borrower’s credit scores, allowing no-money-down loans, interest-only loans, the securitization of mortgages, etc. Do you think all of those are a result of a global savings glut? Or are there other fundamental factors that led to those actions?

2. On savings, do you believe that Americans will begin saving much more of their incomes in the coming years than they have in recent years? I think it’s Stephen Roach from Morgan Stanley who is predicting that consumption will fall from 71% of GDP to somewhere in the 60%+ range, more similar to a few decades ago. He argues that Americans were experimenting with allowing asset appreciation to replace their need for savings, but now that the bubble has burst, we’ll return to saving from our incomes. If that’s the case, it’s probably a good thing for individuals, but could that be harmful for the economy as a whole by causing another savings glut or by causing consumption to grow slowly for a number of years?

Personally, I can’t help but think that more savings would be positive for America, but I suppose it’s possible that a positive for individuals might be a negative for society. What do you think?

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