Saving, Spending, and the Federal Reserve
January 18, 2008
by William P. Meyers

Those who give advice have told the American people, for decades, that they should spend less and save more. Apparently towards the end of 2007 Americans, or enough of them anyway, finally learned their lesson and cut back on spending. Now Wall Street and their servants at the Federal Reserve Board are in a panic. Their plan: cut interest rates, inject credit into the big banks, and get Americans over-spending again. Add to this the genius of politicians who will use this opportunity to do some more tax cuts and run up a higher federal deficit, and you have an election year.

 

You had to be really an idiot to believe in 2006 that house prices would go up forever. One might forgive the folly of some people who just wanted to own a home, but speculators and lenders should have known better. Even those who wanted to own a home were doing the typical American fatter-is-better thing: people who could easily afford a 1000 square foot home were taking out jumbo mortgages to move into 3500 square foot homes. For a year a two the American Dream, typified in the Beverly Hillbillies, had come true. Even a clerk at WalMart could get a loan to move into a MacMansion. People with real job skills were buying palaces. And the truly spendthrift, who bought houses before 2005 and saw their on-paper value of their comparables double or triple, added to their mortgage debt so they too could lead the American version of the good life.

 

So now interest rates are being cut down to practically nothing. It is mainly to save the greedy idiots who ran the big banks and brokerage houses, the Citicorps and Merill Lynches and Morgan Chases. It will help Americans spend their way through the slowdown or recession. It will lower interest rates on CDs, stressing out senior citizens. The Fed is bringing another truckload of bad hooch to the party. Hooray!

 

So is saving money bad? Is being thrifty bad? Is buying a Corolla instead of a Hummer bad? Is living in a 1000 square foot house bad?

 

According to the Fed and the creatures that pass for financial reporters in the U.S., saving is good for individuals, but bad for the economy. The savers loan to the spendthrifts and on we tumble; everyone can't save.

 

Of course all you have to do is look outside America to see that national economies don't have to be based on a spendthrift culture to grow. China is a good, big example. People save more their. This creates a virtuous cycle (if economic growth is the goal): savings is invested in production. Rising production allows for more consumption and more savings.

 

Americans, from the Fed to the average Jack and Jill, have forgotten about the value of productivity. Ignore for the moment the ecological impact of all this. Think: if we produce more we can sell more, locally, nationally, and globally. Then we can save more and even spend a little bit more too.

 

Well, a lot of houses were built in the U.S. between 2000 and 2007. They were big houses that require a lot of carbon fuel to keep warm in winter or cool in summer. So here's a project: lets split them all in half. Half a MacMansion should be plenty of room for most families. And affordable too.

 

How about a 3 month home construction holiday? Give the workers a rest and a vacation. Allow some of the excess inventory to be absorbed. When people see that prices are no longer falling, what with ultra-low mortgage interest rates being in the vogue again, the market will get on an even keel.