Mortgage Crisis Silver Lining: Savings on the Rise

November 13th, 2008 2:39 PM

The sky is falling

The mortgage industry isn't what it used to be. Defaults are astronomical, and foreclosures continue to rise. Housing values are still sliding, and banks are saddled with properties they can't sell. Illiquid mortgage-related securities threatened to shut down our financial system. And now that lenders have realized the problems associated with exuberant lending, they've overhauled their underwriting requirements, leaving many qualified borrowers without access to funds.

A return to personal savings

Amid this chaos, consumers are cutting back on spending, and adding money to their savings. While this trend may slow down an economic recovery in the short term, it's a positive development for the long-term financial health of American households.

The U.S. Bureau of Economics tracks a metric known as the personal savings rate; this is the percentage of one's income that's saved rather than spent. Between 2002 and mid-2004, the personal savings rate in this country hovered around 2 percent. In 2005, the rate shrank to 1 percent, and then turned negative mid-year. A negative savings rate indicates that Americans outspent their income, using debt to fill the gap. Between 2006 and early-2008, the rate remained depressed, only ticking more than 1 percent in one quarter.

In the second quarter of 2008, the personal savings rate jumped dramatically to about 2.7 percent. That's the highest it's been since 2002. It's likely that the data was influenced somewhat by the economic stimulus checks that were mailed out to taxpayers earlier this year. But even so, the change indicates a movement towards more prudent financial management.

Stability in the making

Broad-based growth in personal savings has its advantages. Financially stronger consumers are less dependent on credit cards, and better able to manage through unexpected circumstances. Plus, increasing bank deposits can fuel job growth-as banks have more money to loan, businesses will have an easier time financing their growth initiatives.

Of course, these positive impacts won't be felt in the here and now. In fact, the near term effect is likely to be negative. When consumers spend lower percentages of income, businesses feel it in reduced sales and profits. That's a reality that can't be avoided.

The LA Galaxy is now tasked with retooling the team in the off-season for bigger and better things next year. Hopefully, the growth in personal savings will help the U.S. economy make its own comeback, too.

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