Above shows the Mortgage Equity Withdrawal (MEW) rate. Note the high point in 2004-2007, then after the housing crunch, it dropped off to almost zero in 2009.
WHEN I was 19, my grandpa, Matteo Mimmo, drove me to the Ben Franklin National Bank in his black Mercury sedan.
Together we walked into the safe deposit vault. After turning the key and opening the narrow metal box, he showed me a savings book (remember those?) with deposit entries going back years and pointed to the balance, about $15,000, and said in his broken English: “I give this to you, for school.”
That’s right. For one year my college education was funded by my grandpa. It was the only year of my life since age 16 that I did not work. His act of personal savings helped propel me closer to my bachelor’s degree.
That was 1978 and it seemed like the last year Americans saved money at a decent rate. Fast forward to 2005 when Americans were saving at a negative rate for the first time since the 1920s. In 2009, that rate has climbed back from slightly above 0 in 2008 to 5 percent in January and 6.9 percent in May, according to news reports.
This is a good thing, right?
No, not according to macroeconomists who say the sluggish economy won’t zip ahead without a burst of consumer spending. A CNN Money.com report said this about Americans’ new thrifty nature: “Why saving is killing the economy.”
Now, hold on one minute.
In the spendthrift days of the late 1990s and all the way up to 2005-2006, consumers spent wildly on homes they couldn’t afford, cars they couldn’t afford, jet skis, well, you get the point. And the economy gods, including Fed Chairman Alan Greenspan and those greedy bums on Wall Street, were feeding the barn fire. (NOTE to picky grammarians: I meant this as a joke, as in burning down the barn or house as in collapsed housing market.)
“What fueled the consumption binge was consumers who tapped their homes and used them as ATM machines,” said Keith Leggett, senior economist with American Bankers Association in Washington, D.C. “They were spending more than their income could support.” (See the above graph)
When the housing market collapsed and the bills came due … well, you know what happened. The economy collapsed like a tent in the wind.
No, the problem with Americans was not in the saving, it was in the spending. So don’t tell me that it’s wrong to save now. That’s a load of bull.
I say, we can, no, we should do both (that is, if we have jobs or an income). Leggett emphasized that spending wisely is what we should be doing to help the economy.
However, we’re not so much because we’re hunkered down, worrying about the future, our jobs, our rising utility bills, etc.
So is there an upside to all this saving, I asked Leggett. Surprisingly, he said yes.
First, the increase in personal savings are keeping interest rates low. How is this good, I asked, when I can barely get 2 percent interest on a CD without tying it up for five years? Because having more money in our banks means we’ll need less foreign money as a nation. “From a national defense standpoint, do we want to be heavily reliant upon foreign governments to finance our government?” Leggett asked rhetorically.
Saving for a rainy day, or for retirement, will help our national defense. I like that.
Second, more savings in banks will lead to more capital formation, which will lead to more loans to businesses to buy more equipment and hopefully, hire more workers.
Third, as people save and capital increases, and as things wear out and people replace those items, the economy will grow, he said. When that happens, and the recession recedes, interest rates will go up. And that will be good for personal savings accounts and personal savers.
The only answer “not on my secret eight ball” said Leggett is whether this year’s shift to a prudent consumer/saver is temporary or permanent. That remains to be seen.
Personally, I like the example set by my Grandpa Mimmo. He spent wisely and oh yes, the savings part really helped a young kid from Long Island attend college in California.