Spenders, Savers and the Global Financial Crisis

Today's edition of The Washington Post contains an article worth your notice. Fed Chairman Ben Bernanke spoke at a conference on Asian and the global financial crisis, sponsored by the Federal Reserve Bank of San Francisco.

Within the speech, he noted that the basic imbalances that led to the crisis were still in place. Specifically, he warned that the U.S. spends too much and save too little; while Asian nations save too much and spend too little. This creates a situation where Asian nations, amid the proverbial "savings glut", seek "safe" havens for their excess funds, driving down interest rates here. The U.S. uses these "cheap" funds to finance demand, rather than financing it through our own saving. (And, please note, he referred to personal and government borrowing.)

One of the basic ideas in economics is that people respond to incentives. He seems to suggest that it's time the U.S. encouraged saving and discouraged spending, on both the personal and governmental level. (This can apply to the corporate level, as well. Maybe there would be incentives to encourage investment out of retained earnings, but not through debt?)

These are just some thoughts to throw out to the students when you discuss "fiscal policy" during the semester.