The real reason behind the US banking crisis

For the last four or so years, US households have saved virtually nothing.

Back in the early 1980s, US households saved around 10 percent of their income. Since then the ratio has fallen to zero. The decling savings rate took off in the early 1990s and fell off a cliff around 2004. In fact, in 2006 the rate became negative; an extraordinary development.

Why did this happen? The Fed hasn't exactly encouraged savings with years of low interest rates. Moreover, the dot com and housing bubbles, gave people the deluded impression that they were getting richer simply because the asset values were rising. If was as if you could become richer and spend all your income at the same time.

More recently, there are tentative signs that things are turning around. The savings rate began a slow recovery earlier this year. However, if the rate is to return to the levels seen back in the early 1980s, US households will have to reduce consumption dramatically. That sounds a lot like recession.