A Silver Lining to the Financial Crisis

It's hard to find anything to smile about in the economy these days. Portfolios are in tatters. Jobs are being slashed. The market can't find a floor. National debt can't find a ceiling. Inflation, oil, home prices … it's not hard to see why the myriad issues draw comparisons to the Great Depression.

Yet beneath the ruckus, one statistic -- perhaps the most vital component of getting back on a sustainable track -- is doing better than it has in years.

People are saving money again.

And in a big way
The Bureau of Economic Analysis reports consumers saved an annualized $297 billion in the second quarter -- more than 10 times higher than the first quarter, and the highest quarterly savings since 1995. From 2004 through 2007, the average rate was around $85 billion. In the third quarter of 2005, things got really out of hand, with a negative savings rate … meaning that as a collective body, living paycheck-to-paycheck meant you were ahead of the pack.   

Thank goodness those overextended days are gone.

It's about time
As was the case with oil prices, people don't start changing their ways until the problem is shoved down their throat. It took $4 gasoline to get people to wake up, and to get innovation from companies like Sasol (NYSE: SSL  ) and electric cars from Toyota (NYSE: TM  ) and General Motors (NYSE: GM  ) to start being taken seriously. Necessity is the key to innovation, the proverb goes.

The same goes for saving. As Lehman Brothers, AIG, and Bear Stearns will tell you, greed clouded by optimism can be an awesomely overwhelming force. Saving went out of style because, at the rate things were going, few saw a need to. Why save when your house went up by 20% every year?

That's all changed in the past few months as people are realizing that Visa (NYSE: V  ) , MasterCard (NYSE: MA  ) , and American Express (NYSE: AXP  ) will make you richer in your brokerage account than they will in your wallet. As reality sets in for millions of Americans blindsided by home foreclosures and job losses without a safety net to fall back on, people are scrambling to rebuild and replenish their personal balance sheets by saving again.

And that problem was yours and yours only
Which brings up another point: Can we really put all of the blame for our current woes on Wall Street? Of course, the army of Harvard-stupid Wall Streeters (thanks, Bill) were leading the charge, orchestrating the disaster we're now facing. They screwed up. They should pay the price. And they are.

But the larger picture is that it wasn't just Wall Street gorging on more debt than they could handle and taking excessive risks. It was nearly everybody. By 2005, over a quarter of Americans' income went toward revolving debt payments. Debt was the lifeblood of the economy, and the chickens have come to roost.

I dug up a few headlines from major newspapers and magazines, all published between 2001-2006, that might remind us how overextended we were. Here are a few:

  • Saving in 2005 Worst Since 1933
  • Equity Shrivels as Homeowners Borrow and Buy
  • As Personal Savings Fall, a Comeuppance Is Due
  • The Way We Live Now: Home Sweet Debt
  • Our Vanishing Savings Rate
  • Overwhelming Majority of Americans Feel Consumers Are Taking on Too Much Debt

So, yeah, maybe it wasn't just Wall Street
When AIG (NYSE: AIG  ) gets in over its head, it's a sin, and they're a criminal. When John Q. Citizen gets in over his head, it's a tragedy, and he's a victim. That blame game is an irony to this debacle that'll likely only prolong our recovery.

But enough pointing fingers. For once, let's focus on the good news: People are saving again!

How does that help the economy? Countries, like people or business, grow wealthier over time by saving money and investing it wisely. It really is about as simple as that. True, our economy managed to grow over the past decade with little or no savings. How? We borrowed. And that's why it's falling apart today.

When an economy saves money, it has the resources it needs to invest without borrowing from someone else (Chinese and OPEC nations), and it creates real wealth. Domestic savings creates a pot of money borrowers can turn to for investments in projects that eventually create jobs, keep interest rates low, and push the economy along at a sustainable pace. The important part is that it's our savings -- not savings from foreign nations we became beholden to over the years to sustain our lavish lifestyles.

The bottom line is simple: people -- and economies -- that work hard and spend less than they make will grow wealthy. People -- and economies -- that borrow heavily and spend more than they make will grow poor.

It doesn't get much easier than that.

For related Foolishness:

What now? The Motley Fool is here to answer your questions about this financial crisis. Send us an email at AsktheFool@fool.com, and check back at Fool.com as we answer your questions and cover the latest on the Panic of 2008.

Fool contributor Morgan Housel doesn't owns shares in any of the companies mentioned in this article. Sasol is a Motley Fool Global Gains and Motley Fool Income Investor selection. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express and has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2008, at 1:11 AM, Inklebee wrote:

    Personally I think this Panic is exactly what America needs. Maybe now we'll put down the credit cards, stop using our houses as ATMs, never lease a car again, and commit to a life within our means in which we can grow real capital. I think the next few generations will look alot like the 30s through the 70s, when people used real money and hard work to build actual wealth. No more money made of clouds. The era of Financiers is over; this century belongs to the Capitalists! Stop consuming, start saving. Frugal is the new black.

  • Report this Comment On October 24, 2008, at 12:40 PM, ricej1969 wrote:

    I hope that you are right Inklebee. My wife and I have always been the frugal type. We bought our current house last year with payments we can handle without a problem. Even though our 401Ks and IRAs are suffering now, they will bounce back, since we have time on our side. We are not buying stocks at big discounts. We have other investments which are making us 16% right now because we paid cash, and they are not market related. Being frugal paid off for us.

  • Report this Comment On October 24, 2008, at 12:42 PM, ricej1969 wrote:

    By the way, we live debt free beyond our current mortgage. And the credit cards companies pay us through cash back rebates.

  • Report this Comment On October 24, 2008, at 3:38 PM, ATrustingFool wrote:

    Wall Street was no more or less greedy than pretty much anyone one else would be if they had the chance to grab the golden ring. I think they deserve some of the blame but don't kid yourself - the power in control of our congress deserves a lot of the blame. If you don't think so, just read the 13 page summary of Basel II which have Barney Frank and Chris Dodd headed committees controlling these new risk assessments. These men were in control of how tight or loose of hold they held on Fannie Mae and Freddie Mac. They executed the Potomic Two-Step flawlessly in wave after wave of finger pointing to the Wall Street crooks and the greedy CEO's with their outrageous saleries. I am no fan of multi-million dollar saleries for upper managerment but these guys are responsible for taking their eye off the ball and lining their own pockets... in the meantime we take the hit no only for the bail out but also for the painful protfolio values.

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