First, my in-laws are really great, but they certainly fit some of the quintessential German themes:
- My father-in-law’s name is Ferdinand.
- My mother-in-law’s name is Helga.
- Their last name is roughly translated as beer.
- They live in a house with separate heaters in every room.
- In the summer, Helga spends hours and hours maintaining her lovely gardens around the exterior of the home (Germans take a lot of pride in the aesthetic appeal of their homes).
- The refigerator is small, but not too small.
- They each have their own bike with a basket.
- Their car is a tiny, but not too small.
- They recycle everything, where each recyclable item has its own container.
However, not all of what you read or hear about the Germans is true. Note: it should be cleared up right here, the Germans really do love David Hasselhof! The NY Times paints a unsavory picture about what the average German thinks of the the global financial crisis and the growing international trend in bailing out banking systems:
“Germans tend to be the strait-laced, play-it-safe types in financial matters. That has left them particularly frustrated at footing the bill for bank bailouts and fretting over their accounts because of a global financial crisis that seems to emanate from the spendthrift ways of others and the unfathomable risks taken by Wall Street bankers.”
I disagree. Germans are not frustrated – just nervous - everyone else around the world. Last night, we spoke about TARP during dinner. I asked Ferdinand (my father-in-law) what he thought about the TARP bill, and this is what he said:
“Einzige Möglichkeit, um den totalen Zusammenbruch zu vermeiden.“
Translation: [TARP is ] the only possibility to avoid a complete crash [of the banking system].
Does that sound like a particularly frustrated German to you? Me neither. Another example of the NYT’s misrepresentation of the average Germanis:
“Germans abhor credit. And few own stocks, just 5.4 percent according to a study by the Deutsches Aktieninstitut, a nonprofit group that promotes equity ownership. Instead, most Germans sock away 11 percent of their incomes on average into savings accounts, often with Sparkassen, municipally owned savings banks that are popular and stable.”
But do the Germans really abhor credit? No. And do they stock 11% of their income into average saving accounts? Yes, but that is not the whole story.
It false to say that Germans abhor credit – they are just more responsible about it.
I assure you that the German credit markest are functioning just fine, and that many Germans accumulate plenty of debt. They buy homes, cars (yup, they take out mostly car loans according to Ferdinand), and use credit cards on a daily basis. However, lending standards are likely tighter in Germany relative to those in America. According to Ferdinand, the average German's down payment on a home is 40%, where the remaining 60% is financed (credit), while Americans pay juse 20% down - if that. If a German can’t afford a home, then he doesn’t buy it.
Germans shop, eat, have fun, and use credit cards. Today was a special Sunday in Celle, where the shops were open for business (most everything is usually closed on a Sunday). The town was busting at the seams with shoppers and many were paying with credit! However, it is more likely that a German using a credit card will pay the monthly balance in full than is an American using a credit card.
It is false to suggest that Germans are risk averse to a fault (as the article would have you believe).
Note: there are no statistics in the article referring to the average American’s portfolio, so I cannot compare, but the article states, “11% of their income into average saving accounts.” Yes, they are quite liquid –17% of Ferdinand’s portfolio is liquid – but he does own riskier asset like bonds (they are older, so it makes sense that half of their portfolio is in bonds), real estate mutual funds, and stocks (around 10% of the portfolio is in stocks). However, at least their money will be there if a systemic crisis hits.
Whether the Germans like or dislike credit, or whether they have all or none of their money in the stock market is a mute point. What is important is that Germans have set themselves up for a much milder fall from the global financial crisis than have the Americans: Germans save more.
The chart illustrates the quarterly household saving rate for Germany and America spanning 1980 to 2008 (quarter 2). Over the last decade, the average German saving rate is 11.8%, while the average American saving rate is just 5.4%. The last decade has seen that differential grow to Germans saving 10.1% on average and Americans saving 1.9%.
The Germans like to save, but they have been known to get greedy (like in the securitized asset bubble of late). According to the NY Times, “one very big exception [to the claim that Germans abhor credit] came during the dot-com bubble, when even the equities-shy Germans grew exasperated watching everyone else get rich playing the stock market. They piled in just as the bubble was about to burst, in an unfortunate case of better late than never that turned out to be better never than late.” The shows the German saving rate declining right before the bursting of the tech bubble, but it had been declining since 1991 – well before the bubble was even forming. The Germans learned their lesson quickly, and the saving rate increased steadily ever since.
On the other hand, the American saving rate has continued its downward trend. When the risk of inflation was creeping up, and the initial stages of the subprime mortgage meltdown were underway, the Deutsch started to save more while the Americans continued to save less.
The Americans could learn something from the Germans.
With higher saving, consumption in Germany will not fall as much as it will in American. All else equal, a temporary and negative shock to income (an economic recession) will induce people to save less in order to maintain a steady consumption stream. So, the Germans will dissave and consumption will not tumble. On the other hand, the average American has no saving to reduce, so the only option is to consume less.
The Germans – with their not so risk averse investment behavior and high saving rates – may weather this banking storm better than the Americans will.