Greenspan's Save-Versus-Spend Prediction Meets Skepticism

Alan Greenspan foresees a surge in the U.S. savings rate, which could be good news for the mutual fund industry, but the Federal Reserve chairman's prediction isn't finding a lot of support among other leading economists and academics, a Bloomberg news report suggests.

Speaking before the House Financial Services Committee on Feb. 7, Greenspan said the that national savings rate, which has sunk to a five-year low of about 1%, will soon rise as the national appetite for mortgage refinancing abates. Record-low home re-financing rates in recent years, which came on the heels of an equally stimulating stock market boom during the 1990s, fueled a spend-versus-save attitude among Americans. A closely watched report from the Office of Federal Housing Enterprise Oversight seems to support Greenspan's theory. The latest Ofheo index shows that housing prices rose 11% in the fourth quarter versus a year ago. That's the largest gain since 1979, the Bloomberg report reveals.

Not everyone, however, shares Greenspan's thoughts the nation will soon begin socking away money instead of funneling it into home mortgages that can later be refinanced for spending cash.

Roger Kubarych, a former staffer at the Federal Reserve who is now a senior economist at HVB America in New York, said "there's a long ways between where mortgage rates are now and the level that people in the business believe would be needed to stifle the current housing boom." Benjamin Tal, a senior economist at CIBC World Markets in Toronto adds that the current economy needs a savings rate of about 5% or 6%, while the housing slowdown Greenspan speaks of would provide a 2% hike at best.

And Edward C. Prescott, a professor and Nobel Prize winning economist at Arizona State University in Tempe, goes as far to say that data showing national savings at record lows is flawed. Determining the net worth of Americans relative to their income would provide a more accurate measure and show "savings are high, with wealth levels now at more than four times household income levels, up from just over 3% in 1971.

"As long as people's wealth relative to income stays high, Americans are in good shape, and it can be sustained. If America's wealth starts going down, then I start worrying," he said.

Those comments, the Bloomberg report offers, reflect a larger shift in the spending habits of Americans over the last 20 years. Previously, workers would spend their income, put it in the bank, or pay off their mortgages early. Now there are many more choices, such as mutual funds and individual retirement accounts.