Households Paid Down Debt Instead Of Adding To Savings Accounts During Recent Recession

During the recent recession and financial crisis, households paid down debt instead of putting the extra cash into savings and retirement accounts.

From Federal Reserve Bank of New York Staff Reports, January 2011, "Household Debt and Saving during the 2007 Recession" by Rajashri Chakrabarti, Donghoon Lee, Wilbert van der Klaauw and Basit Zafar:

increase in saving―at least in 2009―did not materialize through an increase in contributions to retirement and savings accounts. If anything, such contributions actually declined on average during that year. Instead, the higher saving rate appears to reflect a considerable decline in household debt, as households paid down mortgage debt in particular. At the end of 2009, individuals expected to continue increasing their saving and paying down of debt, which is consistent with what we have observed so far in 2010. [Empahasis added]

Read the full research paper here.

Related articles

• Household Debt: $11.6 Trillion And Falling (npr.org)
• A Terrible Way To Fix The Economy: Households Deleveraging Through Defaulting on Debt. (rortybomb.wordpress.com)
• U.S. households reduce debt 10th straight quarter (marketwatch.com)

International Comparison of Capital Structure

From "An International Comparison of Capital Structure and Debt Maturity Choices" by Joseph P.H. Fan, Sheridan Titman, and Garry Twite, NBER Working Paper No. 16445, Issued in October 2010, (ungated version available here):

This study examines the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in 39 developed and developing countries. We find that a country’s legal and tax system, the level of corruption and the preferences of capital suppliers explain a significant portion of the variation in leverage and debt maturity ratios. Our evidence indicate that firms in countries that are viewed as more corrupt tend to use less equity and more debt, especially short-term debt, while firms operating within legal systems that provide better protection for financial claimants tend to have capital structures with more equity, and relatively more long-term debt. In addition, the existence of an explicit bankruptcy code and/or deposit insurance is associated with higher leverage and more long-term debt. We also find that firms tend to use more debt in countries where there is a greater tax gain from leverage, while firms in countries with larger government bond markets have lower leverage, suggesting that government bonds tend to crowd out corporate debt. Countries with more extensive defined benefit pension funds have higher debt ratios and longer debt maturities, whereas those with more extensive defined contribution fund activities have lower debt ratios. In addition, debt ratios are lower in countries that limit the bond holdings of pension funds. Finally, we do not find a significant association between financing choices and the size of the insurance industry.