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Source link: http://archive.mises.org/9914/savings-is-not-just-a-good-thing/

Savings Is Not Just a Good Thing

May 7, 2009 by

Regions Bank scored the worst of the nation’s 19 largest banks on the federal government’s stress tests. The bank’s chief economist, Bob Allsbrook, concedes that saving “can be a good thing,” but goes on to explain the “paradox of thrift.” I wonder where he thinks investment comes from. FULL ARTICLE

{ 18 comments }

Barry Loberfeld May 7, 2009 at 8:47 am

“We know better, which explains much of the public anger rightly directed at the corporate state today. But this is mercantilism, not capitalism.”

From “What’s Really Reactionary?”:

The situation was paralleled across the Great Pond, where a nation virtually born of a revolution against mercantilism began to sire its own mercantilist enterprise. Mythologized as the “Progressive Era,” when the Little Man and his (self-anointed) champions rose up to bridle the “economic power” of Big Business, this was actually — in the phraseology of Gabriel Kolko — a “triumph of conservatism,” wherein the established “business and financial interests” sought to fend off upstart competitors by resorting to reactionary means: government intervention in the economy.

READ THE ENTIRE ARTICLE.

Bob May 7, 2009 at 9:29 am

Wow, I better get my money out of Regions Bank right away! (Really I have two accounts with them.)

Oh wait, FDIC! Whew!

Moral hazard, I am you.

Dennis May 7, 2009 at 10:21 am

In his above quote, Mr. Allsbrook commits a fundamental error in that he confuses savings with an increase in the demand for money. Unfortunately, this fallacy is committed by most economists steeped in Keynesianism and results in pernicious policy recommendations.

DJ May 7, 2009 at 10:51 am

“The Paradox of Thrift”???

Why can people who are supposedly more intelligent then I am, not see the folly in this kind of thinking?

I’d like somebody at Mises to please write an article with the title “The Paradox of Consumption”.

Ohhh Henry May 7, 2009 at 12:11 pm

It is not surprising that the worst bank has the worst economist. Rather Darwinian I’d say. Fortunately government is here to punish the fit and reward the unfit.

Greg Gaeta May 7, 2009 at 2:54 pm

While I agree with the tenor of your argument I would only add that the trouble many banks find themselves in is not entirely “self-inflicted”. The Community Reinvestment Act was a direct form of coersion by the federal government enforcing an affirmitative action lending policy and punishing banks that did not comply. While the CRA was not enforced during the Reagan and the first Bush administration, both Clinton and Bush II put the bank’s feet to the fire all in the name of expanding home ownership. Since these sub-prime borrowers didn’t qualify under standard terms the banks designed ALT- A and other “liar loans”. The banks knew there were bad loans and needed a way to get these bad loans off their books. This is where securitation came in. By slicing and diceing these bad loans in the form of CMO’s, CDO’s etc, you can obscure the bad loans into what are now referred to as toxic assets.

Greg Gaeta May 7, 2009 at 3:01 pm

While I agree with the tenor of your argument I would only add that the trouble many banks find themselves in is not entirely “self-inflicted”. The Community Reinvestment Act was a direct form of coersion by the federal government enforcing an affirmitative action lending policy and punishing banks that did not comply. While the CRA was not enforced during the Reagan and the first Bush administration, both Clinton and Bush II put the bank’s feet to the fire all in the name of expanding home ownership. Since these sub-prime borrowers didn’t qualify under standard terms the banks designed ALT- A and other “liar loans”. The banks knew there were bad loans and needed a way to get these bad loans off their books. This is where securitation came in. By slicing and diceing these bad loans in the form of CMO’s, CDO’s etc, you can obscure the bad loans into what are now referred to as toxic assets.

razzz May 7, 2009 at 4:04 pm

Those fractional reserve bankers just go to pieces when compounding interest reaches it unsustainable phase.

Where growth equates to enhancing personal well-being by getting your finances in order instead of conforming to some failed economic model, you’ll get punished with taxes.

Pablo May 7, 2009 at 5:04 pm

I would suggest the BBC 4 Documentary The Ascent of Money from Neill Fergusson. He details the origins of the frase Sub-Prime. Besides the Doc is very Austrian indeed.

Pete May 7, 2009 at 6:50 pm

Oh, how quaint, to assume a big bank would employ an economist who understands economics.

iPlastic May 7, 2009 at 7:06 pm

I always feel insulted when I hear commentators use that phrase. Us “little people” are too unsophisticated to understand that saving really isn’t good for us?

Excuse me, Mr. Allsbrook, when times are bad, we do what we need to do, and that is get out of debt, stop spending frivolously, and SAVE!

Paradox of Thrift, indeed! As if it will go on forever, we will go on saving and saving and never spend again. Give me a break.

Bennet Cecil May 7, 2009 at 8:36 pm

The 19 largest banks should be split into 100 banks in the same way Ma Bell was forced into birthing the Baby Bells. The government has made these 19 into an oligopoly. Smaller banks are allowed to fail but taxpayers have been forced to keep these 19 in business. That is unfair. We do not need to continue the systemic risk of “too big to fail.” Premiums for FDIC insurance should be raised to help pay for this mess.

Finally, and most importantly, fractional reserve lending should be phased out as the economy heats up. Force the banks to hold all of these freshly printed dollars in their vaults instead of letting them circulate worsening inflation! That will stabilize the economy and make banks safe.

P.M.Lawrence May 7, 2009 at 8:49 pm

“Savings” is not a thing at all. It’s plural.

newson May 8, 2009 at 1:03 am

give him a break, he’s american. only in english is “savings” plural.

P.M.Lawrence May 8, 2009 at 1:55 am

If his circumstances make his need greater, all the more reason to provide the information. It’s not reproof but instruction.

2nd Amendment May 8, 2009 at 7:22 am

“Oh wait, FDIC! Whew!”

You really think it’s that simple ?

First of all, WHERE is your book value written and do you even know WHAT is your book value.

Newsflash, your bank account statement, especially the one you print from your online access is NOT legal tender and cannot be used to claim money from the bank.

So basically you have no legal documents to prove how much you’re worth.

Your net worth is pretty much decided by the bank and the FDIC.

They can decide you are worth $1000 or even $10000 less than what you’re really worth, plus any money above the FDIC limit is simply lost.

The very fact that the system needs an FDIC is worries me a lot. This means the system is bankrupt by design and needs artificial garantees.

In a true capitalist free market system, the risk would be beared by the depositor and the bank. But then again credit would be difficult and expensive and interest rates would be higher, to compensate depositors for their risk taking.

Right now, credit is easy but banks pay nothing in interests and even charge you fees for just about anything.

2nd Amendment May 8, 2009 at 7:33 am

Thrift if just delayed splurge, I don’t see any paradox here.

Must all monies be spent at once simultaneously ?

Isn’t it better to have a sustainable economy where people save and spend later without breaking their backs ?

It’s a good thing that people save money because if nobody did, the value of the US dollar would plunge faster than the Zimbabwean dollar.

The paradox of consumption and of borrowing to consume even more means that people who work hard and save are being robbed by inflation.

The paradox of consumption means that even if we hire more people and pay them more money, they are getting poorer and poorer because of inflation.

Consumption or Saving habits is only a paradox if you consider money to be a collective property instead of an individual property.

Those keynesian socialists dream of robbing us all of our money and spending it all like crazy to run the economy.

It’s NOT a paradox because it’s MY money and I have the right to do whatever I want with it. I can even use it to start my wood stove if I want to. I can use $100 bills to start my woodstove if I want to.

If it’s mine then I can do whatever I want with it, I can save it forever if I want and I can even burn and destroy my money if I want to.

If I am not allowed to save nor destroy my money in my wood stove, this means that I am not really the owner of my money.

The government and socialists think that individuals don’t really own their money but that their money belongs to the government and to the collectivity.

That’s why they think there is some sort of paradox.

In fact, the real paradox in their mind is OWNERSHIP.

They should come clean and admit that what they really mean is THE PARADOX OF OWNERSHIP !

Stephen Grossman May 8, 2009 at 11:35 am

>real savings….funded investment that produced output that people saved to purchase.

This is a good essentialization of intertemporal capital structure.

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