Lehman Brothers

Scarred by the financial crisis, families around the world play safe with their money

Pulling back from stocks and shunning debt, they have cut spending and put cash in savings and bonds

PUBLISHED : Monday, 07 October, 2013, 2:36pm
UPDATED : Tuesday, 08 October, 2013, 12:45pm

Five years after US investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in major countries around the world are still hunkered down, too spooked and distrustful to take chances with their money.

An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of US dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.

“It doesn’t take very much to destroy confidence, but it takes an awful lot to build it back,” says Ian Bright, senior economist at ING, a global bank based in Amsterdam. “The attitude towards risk is permanently reset.”

A flight to safety on such a global scale is unprecedented since the end of the second world war. The implications are huge. Shunning debt and spending less can be good for one family’s finances. When hundreds of millions do it together, it can starve the global economy.

Weak growth around the world means wages in the United States, which aren’t keeping up with inflation, will continue to rise slowly. Record unemployment in parts of Europe, higher than 35 per cent among youth in several countries, won’t fall quickly. Another wave of Chinese, Brazilians and Indians rising into the middle class, as hundreds of millions did during the boom years last decade, is unlikely.

“Lehman changed everything,” says Arne Holzhausen, a senior economist at global insurer Allianz, based in Munich. “It’s safety, safety, safety.”

The AP analysed data showing what consumers did with their money in the five years before the great recession began in December 2007 and in the five years that followed, through the end of last year. The focus was on the world’s 10 biggest economies – the US, China, Japan, Germany, France, Britain, Brazil, Russia, Italy and India – which have half the world’s population and 65 pe rcent of global gross domestic product.

Key findings:

Retreat from stocks: A desire for safety drove people to dump stocks, even as prices rocketed from crisis lows in early 2009, and put their money into bonds. Investors in the top 10 countries pulled US$1.1 trillion from stock mutual funds in the five years after the crisis, or 10 per cent of what they had invested at the start of that period, according to Lipper, which tracks funds.

They put even more money into bond mutual funds – US$1.3 trillion – even as interest payments on bonds plunged to record lows.

Shunning debt: Household debt surged at an unprecedented rate in the five years before the financial crisis. In the US, Britain and France, it soared more than 50 per cent per adult, according to Credit Suisse. For all 10 countries, it jumped 34 per cent.

Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 per cent in the  years after 2007. Economists say debt hasn’t fallen in sync like that since the end of the second world war. People chose to shed debt even as lenders slashed rates on loans to record lows.

Hoarding cash: Looking for safety for their money, households in the six biggest developed economies added US$3.3 trillion, or 15 per cent, to their cash holdings in the five years after the crisis, slightly more than they did in the five years before, according to the Organisation for Economic Co-operation and Development.

The growth of cash is remarkable, because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts. They also poured money into bank accounts knowing they would earn little interest on their deposits, often too little to keep up with inflation.

Spending slump: Cutting debt and saving more may be good in the long term, but to do that, people have had to rein in their spending. Adjusting for inflation, global consumer spending rose 1.6 per cent a year during the five years after the crisis, according to PricewaterhouseCoopers, an accounting and consulting firm. That was about half the growth rate before the crisis and only slightly more than the annual growth in population during those years.

Consumer spending is critically important because it accounts for more than 60 per cent of GDP in most developed countries.

Developing world not helping enough: When the financial crisis hit, the major developed countries looked to the developing world to take over in powering global growth. The four big developing countries – Brazil, Russia, India and China – recovered quickly from the crisis.

But the potential of the BRIC countries, as they are known, was overrated. Although they have 80 per cent of the people, they accounted for only 22 per cent of consumer spending in the 10 biggest countries last year, according to Haver Analytics, a research firm. This year, their economies are stumbling.

It doesn’t take very much to destroy confidence, but it takes an awful lot to build it back
Ian Bright, ING

Consumers around the world will eventually shake their fears, of course, and loosen the hold on their money. But few economists expect them to snap back to their old ways.

One reason is that the boom years that preceded the financial crisis were as much an aberration as the last five years have been. Those free-spending days, experts now understand, were fuelled by families taking on enormous debt, not by healthy wage gains. No one expects a repeat of those excesses.

More importantly, economists cite a psychological “scarring” that continues to shape behaviour. Scarring is a fear of losing money that grips people during a period of collapsing jobs, incomes and wealth, and then doesn’t let go.

Some economists think the psychological blow of the financial crisis was severe enough that households won’t increase their borrowing and spending to what would be considered normal levels for another five years or longer.

Fu Lili, 31, a psychologist in Fu Xin, a city in northeastern China, says she made about 20,000 yuan (HK$25,300) buying and selling stocks before the crisis, more than 10 times her monthly salary then. But she won’t touch them now, because she’s too scared.

Holzhausen says people are shunning stocks for the same reason they’re shunning other investments that involve risk – less a cold calculation of whether the price is right and more a mistrust of nearly everything financial.

“People want to get as much distance as possible from the financial system,” he says. “They want to be in control of their financial matters. People no longer trust in the markets.”

Around the globe, in small ways and large, in expanding economies and contracting ones, consumers remain thrifty.

You can see it on some high streets in Britain, dotted now by secondhand boutiques and pawn shops. Or in weak car sales in Europe, which have plunged to their lowest level in more than two decades. Or in the remarkable rise of Dollar General, a discount chain with 10,000 stores in the US that has more than doubled its profits the past three years.

People no longer trust in the markets
Arne Holzhausen, Allianz

Even the rich are spending cautiously and saving more.

The wealthiest 1 per cent of US households are saving 30 per cent of their take-home pay, triple what they were saving in 2008, according to a July report from American Express Publishing and Harrison Group, a research firm.

The good news is that after years of living with less, paying debts and saving more, many people have repaired their personal finances.

Americans have slashed their credit card debt to 2002 levels, according to the Federal Reserve Bank of New York. In Britain, personal bank loans, not including mortgages, are no larger than they were in 1999, according to the British Bankers’ Association.

And the value of homes, the biggest asset for most families, is rising again in some countries.

Now that people feel richer, will they borrow and spend more?

“The further you get away from the carnage in ‘08-’09, the memories fade,” says Stephen Roach, former chief economist at investment bank Morgan Stanley, who now teaches at Yale.

“But does it return to the leverage and consumer demand we had in the past and make things hunky dory? The answer is no.”