Toward The Housing Bubble, Or Great Depression?

During the middle 2000’s, one more curious economic extreme presented itself in an otherwise ocean of extremes. Though economists were still thinking about the Great “Moderation”, the trend for the Personal Savings Rate was anything but moderate, indicated a distinct lack of modesty on the part of consumers. In early 2006, the Bureau of Economic Analysis calculated that the rate had been negative for all of 2005. It was the first time in seventy years that had happened in the US.

As puzzling as that was for economists, it happened again in 2006. Unsure of what to make of it, the Wall Street Journal asked in July 2007 Is The Negative Savings Rate A Negative For The Economy?

In 2006, the national personal savings rate calculated by the U.S. Department of Commerce was around negative 1%. It was the second straight year that the measure indicated Americans are spending all of their after-tax dollars and then some. In 2005, the savings rate was negative 0.4%.

As a wave of baby boomers approaches retirement, some economists see significant risks in Americans’ apparent inability to sock away any savings. Others argue that worries over scant savings are overblown.

The reason even economists, who almost always argue in favor of debt-financed consumption, were split on the condition was history. The last time the US experienced a sustained drawdown in aggregate savings was in the years 1932 and 1933, the utter worst of the Great Depression and hardly the period with which you might want anything in a contemporary economy to be equivalent to.

The reason for the negative savings rate in the 2000’s was as simple as it was in the 1930’s; in the prior period it was the lack of income (and liquidity, due to bank runs and deposit losses) forcing the unemployed to spend more of what they had literally saved; during the housing bubble, it was home-equity-as-ATM’s.

Rapidly rising stock and house prices, fueled by an accommodative environment of low interest rates and a proliferation of “exotic” mortgage products (loans with little or no down payment, minimal documentation of income, and payments for interest-only or less) have sustained a boom in household spending and provided collateral for record-setting levels of household debt relative to income.