It seems that Ben has never heard of a very old economic principle called The Savings Paradox. What the Paradox says is that when consumers borrow too much money, it is in their best interests to pay down that debt and save money. The Paradox is that this behavior takes money out of the economy and starves it for growth capital exactly when it is needed.
If Ben has ever heard of it (and of course he has), he trying to repeal it. He wants consumers to stop paying down their debts, go out and borrow a bunch of money (at remarkably low interest rates), and this fix the economy.
Hey, wait a minute!! Wasn't it too much consumer borrowing on houses that got us into the problem in the first place??
Go back and re-read yesterday's rant on "This Time Is Different", and then read this article from today's Washington Post. Daneille nailed all the facts!!
Wary Americans saving more, even as government encourages risk
By Danielle Douglas,Americans have poured record amounts of money into savings accounts even though interest rates are at historic lows, new federal data show, a sign that average people may be missing out on a booming stock market and recovering real estate sector.
The total amount in those accounts climbed nearly 5 percent to $6.9 trillion in the spring, the highest level recorded since the Federal Reserve launched its regular reports on the flow of money in the economy in 1945. At the same time, other data show that Americans are fleeing the stock market and avoiding the purchase of new homes.
The pattern suggests that Americans, wounded by the financial crisis and scared by an uncertain job market, do not want to take any risks with their money — even as the government is encouraging risk-taking.
The Fed recently announced an unprecedented plan to pump hundreds of billions of dollars into the financial markets to reduce interest rates, which should have the effect of boosting stock prices and making it cheaper to buy homes.
But if consumers remain on the sidelines, it means the policies may benefit only the most well off and secure — and fail to help average Americans or the broader economy.
“People have lost their appetite for risk,” said Karen Dynan, co-director of the economic studies program at the Brookings Institution. “They’ve been burned by the stock market. They’ve suffered through capital losses on their homes. And so they’re hunkering down in what they view as the safest place to store money.”
Fed Chairman Ben S. Bernanke said most families eventually will feel the effects of the central bank’s policies
“My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some,” he said in a speech Monday. “Only a strong economy can create . . . sustainably good returns for savers.”
The mattress trap
Households began squirreling away cash in the midst of the recession. The savings rate, which was at 1 percent in 2005, generally fluctuated between 5 percent and 6 percent during the recent recession. This year it has hovered around 4 percent, still above historical norms.
“A lot of families have drained whatever savings they had because of hard times — job losses or low wage growth — and are trying to replenish their reserves,” Dynan said.
Nearly half of Americans still do not have enough savings to cover three months of expenses, according to a recent Bankrate.com study.
Even those on solid financial footing are wary about the stability of the economy and unwilling to subject themselves to market risks, said Greg McBride, senior financial analyst for Bankrate. They know they need to invest some portion of their income to create wealth but are not shoveling money into the stock market, despite the possibility of higher returns.
Some say the wild market swings of the past few years have been too unnerving for average investors, and the recent spate of technical glitches certainly does not help. Others peg the outflow from stocks on shifting investment strategies as cautious Americans turn to bonds.
But holding on only to safe bets could prove detrimental to investors in the long run, some analysts say. The rate on the 10-year Treasury bond has been well under 2 percent, and banks typically offer less than 1 percent in interest on savings accounts, not nearly enough to keep up with inflation, let alone build enough wealth for a child’s college education or retirement.
“These so-called safe investments like bonds and cash aren’t nearly so safe when you view them through the lens of lost buying power due to inflation,” McBride said. “A lot of people are taking a lot more risk in conservative investments than they realize.”
Charles M. Jones, professor of finance and economics at Columbia University, said people are extrapolating too much from the recent past as they make investment decisions.
“We’re in a very-low-interest-rate environment, so you have to think every asset class is likely to have low returns for the next few years,” he said. “Stocks have historically outperformed, and they’re going to continue to outperform. Real estate has come to a level where it is similarly attractive.”
But who could really blame Americans for their trepidation?
Many watched what little wealth they created through homeownership or retirement plans evaporate. That kind of devastation is enough to sour most people on investing, or at least make them more conservative in their choices.
A recent survey of investors by money manager BlackRock found that just 11 percent were willing to take on risk in the face of market uncertainty. Nearly half of investors were holding fast to their current portfolio allocations because they were unsure of where to deploy their money.
Investors yanked some $5.1 billion alone in the week ending Sept. 19 while plowing around $8 billion into bond funds — days after the Fed announced its stimulus plan, according to the Investment Company Institute, a trade group for the mutual fund industry.
Only about 20 percent of Americans invest in stocks, the group’s research shows. Even for those who have the money, investing presents tough choices. Steve Love, an individual investor in Los Angeles, said he prefers real estate over stocks even though banks can be reluctant to lend to small-time players.
“With a house, it has a value in that someone has to live in it and I can rent it out for so much money or sell it for so much money,” said Love, 61. “What scares me about the stock market is that you have these little pieces of paper that say I own so many stock, and then you run into an Enron and it turns out to be worthless.”
Contributing to 401(k) plans has become the most popular method for Americans to ensure they have sufficient money for retirement
Few Americans are as fortunate as Gene Dettmann, 62, to have both a pension and a 401(k). Still, he credits his investments outside those plans with allowing him to retire from his IT job in west-central Texas seven years ago.
Dettmann has interests in 41 companies, including Pepsi and Verizon, that he manages on his own with the help of Web sites such as Motley Fool. He said his investment strategy has encountered hiccups — at one point in the 1980s, he saw a quarter of his stock value wiped out. That experience made him wary of the market for several years.
Feathering the nest with individual stocks may not work for everyone — research shows the average American has trouble just managing a 401(k) plan.
“Households are generally ill-equipped to make complicated [investment] decisions,” said Anthony Webb, a research economist at the Center for Retirement Research at Boston College. Still, they could be more conscientious by increasing their contributions and staying out of their accounts, he said.
Americans leaked money out of their plans through cash-outs, loans and hardship withdrawals in the wake of the economic crisis, according to CRR. And while employees were tapping their accounts, employer contributions were slipping.
As a result, the average household approaching retirement had only $120,000 in 401(k) or individual retirement account holdings in 2010, roughly the same as in 2007. That balance translates to about $575 in monthly income.
The good news: Fidelity Investments says the average 401(k) balance has grown a cumulative 58 percent since 2009 to $72,800 at the end of June. Workers are funneling more money into their plans, which received a boost from the performance of the stock market.
“If you save more and invest wisely early on, there’s every reason to think in the long run things will work out,” Webb said.