Saturday, September 27, 2008

The Debts of the Spenders: Lack of Trust Has Created A Nation Of Savers

For years academics and a few far sighted economists have railed against the lack of American savings.

Well, we finally got our wish. Just not in the way we expected.

In the past 4 weeks, the USA has gone from being a nation on credit to a nation of savers. BUT the impetus of this change is based on fear of the banking system collapsing.

This change is not just limited to individual depositors but has spread to institutions. Banks and companies are now hoarding cash, reluctant to lend it out except at the most exorbitant rates (see my prior article on the credit markets).

The impetus of this fear is the federal government's misguided actions at attempting to "solve" the financial crisis. Companies that fail are normally supposed to enter receivership or conservatorship. Their creditors are entitled to a fair hearing before a bankruptcy court to determine the allocation of assets. Different "tranches" or levels of creditors were relatively insulated from losses by the underlying common and preferred stock shareholders who would bear the brunt of the losses.

All of that has changed.

Now, the feds are literally making it up as they go along. Financial institutions are collapsing left and right with only the chosen few allowed to survive.

We now live in an environment of uncertainty.

Institutions were the first to withdraw funds. Now Main Street is panicking and extracting their 401k money from mutual funds. Even foreign investors have caught on and are cautiously taking their capital out of the US.