Did a rising savings rate kick-start the recession?

By Felix Salmon
November 8, 2010
John Carney arrives at all manner of improbable conclusions after staring far too long at this chart:

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John Carney arrives at all manner of improbable conclusions after staring far too long at this chart:


Writes Carney:

The economic crisis followed a lurch in inequality and years of depleted savings–but a far more proximate cause was the return of savings. The climb in savings preceded both the financial crisis and the recession, although it was obviously given a boost by both. But the data very clearly show, the growth of savings started while Wall Street was booming…

It sure looks like competitive savings got started, and kick started the recession.

What is this “competitive savings” of which Carney speaks? Well, he’s found an unpublished paper about inquality and savings in China, and extrapolated wildly to the U.S.:

As the rich get richer and society focuses on wealth as a source of social status, everyone else starts saving more to improve their social status. It’s keeping up with the Joneses in reverse—competitive savings.

The problem is that it’s obviously impossible to take findings from China — where the gross national savings rate hit 53.2% in 2008 — and apply them to the U.S., where the savings rate was less than a quarter of that.

And in any case, the climb in savings did not precede the financial crisis. Bear Stearns had to bail out its subprime hedge funds in June 2007, the recession officially began in December 2007, and Bear Stearns fell victim to the financial crisis in March 2008. The housing market had been in free-fall for over a year by that point, especially in areas with a lot of subprime mortgages.

Meanwhile, the chart shows the spike in savings rates taking place in the second quarter of 2008, after the recession had already begun, long after the credit crunch had had time to bite hard, and after the implosion of Bear Stearns.

Let me make this a little more obvious by annotating Carney’s chart:


Clearly, the rise in savings didn’t precede the recession: it took place entirely during the recession, as you’d expect.

And we’re not seeing “competitive savings” here. Instead, we’re seeing the collapse of the housing market. During the housing bubble, people thought of their mortgage payments as a type of savings — building up equity in their homes. Those figures never showed up in the personal savings rate statistics, but helped to explain why the savings rate was so low: people felt that they were saving in bricks and mortar rather than dollars.

When the housing market crashed, people started spending much less money on housing, partly because they defaulted on their loans, partly because they took advantage of lower mortgage rates to refinance, and partly because rents declined. To a large degree they saved rather than spent the savings, as is natural in a recession. That isn’t competitive savings: it’s simple prudence.


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Don’t forget that the spike to the savings rate in Q2 2008 is a direct result of the tax rebate stimulus passed as a result of that not-yet-started recession.

Posted by MitchW | Report as abusive

“Did a rising savings rate kick-start the recession?”


A razor sharp drop in bank lending and a near total freeze in non-bank lending precipitated the start of the great recession.

Best to think of the drop in bank lending as the spark that set of the explosion. The spark would have been less hamful without the dangerous buildup of debt and leverage over a 10 year period.

A drop in bank lending was the fuse that set off the debt bomb.

Best hopes for less gearing in the future.

Posted by y2kurtus | Report as abusive

Perhaps the prolonged presidential campaign caused the recession. After almost 2 years of the politicos and press talking about things getting worse or being worse than we thought – so elect me, people started to believe the economy was going down and pulled back. They began to put off spending because everyone was talking on the news about the economy not being as good as we all thought. Less stuff got sold, people started to notice left stuff getting sold, verifying the politicos campaign statements, and the downward spiral into a recession was begun.

Posted by zotdoc | Report as abusive

I’m sorry but your ALL wrong !

The straw that broke the “camels back” was a complex interaction between excessive debt and spiralling commodities prices specifically oil.

The media would love you to believe that the withdrawl from the lending and mortgage markets is what caused the failure but I’m afraid that’s populist thinking that has been perpetuated by the press, tv media and failed governements that don’t want to accept their part in the failure and was actually the final blowout / consequence of lax corporate and governmental policy decisions.

From 2004 onwards there were many GLOBAL voices that warned about spiralling house prices running out of control and creating a bubble that would only end in tears. It was in no ones interest to stop the party. the banks were making huge profits a) from the lending and b) from the CDO’s that they sold on. Joe public loved to see their net worth rising faster each month and of course for the speculators / investors (buy to lets) it was easy money and lets face it the best money is easy money isn’t it?

Unfortunately (and I single out the UK Labour Govt and specifically Gordon Brown or is that Clown?) Instead of contacting the regulatory authorities and letting them know that they should enforce 3x salary on all mortgage applications he decided that he would join the party and stuff Governments noses in the trough of greed by raising stamp duty on house purchases at “real terms” lower price levels. (Oh the shame of it Gordon)

Well as more and more participants joined the party and people got loaded up with ever more debt the music started slowing down in the form of a) increased taxes on fuel (uk specific again) and the general increases in fuel prices caused by deliberate (OPEC supply controls) and natural supply restrictions. (limited new oil finds and refining capacity).

Joe blogs who had obtained a mortgage on a house that he/ she could never afford started to notice that the cost of EVERYTHING started rising, fuel for their car and heating, food prices, clothing etc and that their average or below average wages couldn’t cover all the extra costs that they now faced. Ooops !
They never considered that the price of EVERYTHING would rise and they also never considered that if it cost them more to live it cost their employer more to provide services and if it cost the employer more he would be forced to lay off staff or raise prices that risked losing business and laying off staff.

Oh what a web we weave …….

So what was joe public to do? Pay the mortage or put food on the table. They chose food, they reigned in spending and teh banks started to foreclose and guess what? BANG the CDO’s were worthless because the one thing that the rockets scientists in the city never considered was who the hell was going to cover these liabilities. It became a game of pass the parcel

Greed was the bubble. Oil was the pin and when the two met the world went BANG!

Posted by shandy | Report as abusive