Did a rising savings rate kick-start the recession?

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 Well, he’s found an unpublished paper about inquality and savings in China, and extrapolated wildly to the U.S.: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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