Savings and the Housing Crisis

October 2, 2008

One of the common explanations for the current housing crisis, and the subsequent sub-prime mortgage mess is that the U.S. was inundated with cheap money from overseas, a world “savings glut” that depressed interest rates and facilitated reckless lending.  There is a great deal of merit to this argument. There can be little doubt that U.S. interest rates were made low by the inflow of foreign capital, and that this contributed to consumers headlong rush into debt. It also helped create the business environment in which some of the more exotic, and risky, lending instruments looked safer than they were.

But this explanation is often put forward as the whole story when in reality it is a glass half full.

Americans also contributed to the current economic demise by having insufficient savings. Yes, there was a lot of capital (savings) sloshing around the economy, but precious little of it was coming from the bank accounts of U.S. households. If Americans would have had more savings, some of that savings would have been used to put down payments on houses. Instead of the millions of homes sold with essentially no money down many of these homes would be owned by people with equity stakes right from the beginning. Why does this matter? It matters because if you have a 20% equity stake in your house and prices fall you are a whole lot less likely to walk away from your house, allowing it to be foreclosed upon, than someone who has no stake and finds themselves with negative equity when prices fall.  Giving up on nothing is easier than giving up on something. The housing market collapse has fed its downward spiral with this nothing, the savings that never happened, the down payments that never existed.

When I wrote “Whatever Happened to Thrift” I discussed the posibilities of downward economic spirals fed by this lack of savings.  It occured sooner than I had imagined.  I suspect savings rates will tick up in the coming months. History teaches that countries that go through tough times save more money.  We are about to learn thrift the hard way.



  1. Three things here…
    1. The ant and the grasshopper, and the frigging moron Bush..
    2. How to kill a golden goose, and the fricking moron Bush…
    3. “I’m from the government and I’m here to help!!!!}

  2. My grandfather made it thru the depression with $1200, an acre of land, and a gun..
    I have all three, and no debt except galdarn utilities and taxes… My car is 20 years old and my property is paid for…I am pissed off because of the lack of responsibility of all governments, city state and federal..
    I do not feel comfortable at all about what is going on now…

  3. Last comment.

    What good does it do to save in a bank, when some other S.O.B is going to squander it..

    I believe it was Ben Franklin said ” a penny saved is a penny earned” Well that is crap.. What is happening now shows that a penny saved is ~so far~ to be a half cent lost..

    A penny saved when purchasing an item is 3 cents you don’t have to earn.

    Waste ~K~not~~~ this war~~~~ WANT ~K~ not!!!! The shame of all of this is Bush Cheny have a guarenteed security for the rest of their lives, at MY expense…

  4. Re: Charlie Short – a penny invested in the stock market is not a penny saved. Up to 25,000,000 pennies saved in any 1 bank account are still safe, therefore “earned”.

    A question I have for this crisis, and one I’m not hearing anyone answer, is WHY banks, mortgage originators etc. failed to address the asymmetric information problems (adverse selection, moral hazard) involved in lending? There must have been reasons why educated lenders, knowing full-well that a borrower with no down-payment was a serious risk, would ignore the volume of research on signalling and risk management.

    Were there government incentives to encourage lending to those without downpayments? Was there any regulation for maximum consumer debt-loads (ie: 40% of income)?

    In a paper by Ashcraft and Schuermann (2008) “Securitization of Subprime Mortgage Credit”, they discuss the roles of the mortgagor, originator, arranger, warehouse lender, credit rating agency, asset manager, servicer and investor. They discuss the adverse selection, moral hazard problems, principle-agent and fraud problems involved. What I don’t understand is why the players involved seemingly ignored common-sense ideas that are well studied and understood.

  5. Abram, they ignored them because they shuffled the bad loans into CDOs and such and passed them on to the investors in the market. They literally passed the buck, and were only concerned with originating the paper (taking a cut as they did so). The risk was passed on to the people buying the bad paper.

    That’s why this will take some time to unwind; nobody is quite sure where all of the rot is located.

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