Alan Greenspan on the Turbulence of Savings

06.26.08 | Money Management | 0 Comments | by Fred Siegmund

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In his recent book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan discusses savings.

"The shift of shares of world Gross Domestic Product since 2001 from low saving developed countries to higher saving developing countries has increased world saving so much that aggregate growth of savings world wide has greatly exceeded planned investments," he writes. "Or to put it another way, the supply of funds looking for a return on investment has grown faster than investment demand."

His tenure as Federal Reserve Chair began in 1987, so there is also some saving and lending history that he writes about. Speaking of banks in 1987, he says "[they] were in serious trouble."

And what was their problem? "… [Too] much speculative lending; in the early eighties, the major banks had gambled on Latin American debt, and then, as those loans went bad, like amateur gamblers trying to get square they'd bet even more by leading the whole industry into a binge of commercial real estate lending."

Amateur gamblers? Too much real estate lending? Isn't that what we have just been having?

When we save and earn an interest return, we entrust banks and financial intermediaries to use our savings wisely. The best loans for an economy create long lived physical assets.

On the news, I often hear that America's infra-structure needs improving. The levees in New Orleans and now on the Mississippi river need expensive capital improvements.

If banks use loanable funds as amateur gamblers when America needs levees, then it's not just banks that are in serious trouble as Mr. Greenspan mentions.

Remember savers, the more our savings are used to produce new products and new technologies, the more valuable your savings in the future.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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