Wow…Just Wow: The Depth of the Hole

June 12th, 2012 at 2:41 pm

The articles on the Fed’s Survey of Consumer Finance release from yesterday give you an excellent flavor of the magnitude of what’s been lost in the Great Recession.  But I haven’t seen this figure posted yet (though I may have missed it somewhere, of course). 

It’s simply the trend in real median net worth from the SCFs going back to 1989 (this survey is taken every three years; see data caveats below).  There’s a little dip in the 1990s downturn, a flattening in the 2001 recession, and then…a massive cliff dive in the Great Recession.

We’re talking two decades of gains, gone.  Now, it is important to recognize that some those gains, particularly those from that steep climb you see in the latter 2000s, were the housing bubble at work inflating home prices.  And since homes are the primary asset of many in the middle class, that in turn inflated median net worth.

Source: SCF, my adjustments to pre-2001 data using CPI-RS (see data note below)

But there’s no way a shock of that magnitude would not throw our economy way off track.  I’m all for criticizing policy makers, of which I was one at the time, for not going far enough in offsetting this shock.  But this is a particularly clear picture of the depth of the economic hole we dug for ourselves, in no small part due to our allegiance to deregulatory zealots, “efficient (i.e., self-regulating) market hypotheses,” and financialization.

Data caveats: As far as I can tell, the Federal Reserve has not yet released pre-2001 data adjusted for inflation as in yesterday’s release.  I did the adjustments myself and got very close (<0.4% difference) on numbers that showed up in both earlier years and yesterday.  So this should be the same picture that comes out when they release the earlier data later this month.

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6 comments in reply to "Wow…Just Wow: The Depth of the Hole"

  1. Fred Donaldson says:

    And median wealth in Australia in 2010 was slightly less than $400,000:

    But, they have affordable healthcare, education, child and senior care and a minimum wage of U.S. $15 plus an hour.

    It’s not that we are poorer than Down Under, but most of the wealth here is hoarded by a very few.

  2. perplexed says:

    I wonder what happened to total net worth while all of this was going on?

  3. wkj says:

    The SCF probably understates the decline in median net worth since 1989 because of the decline in traditional defined benefit (DB) pension benefits over that period. (DB plan benefits do not appear as an asset in the SCF tabulation.)

    In 1989, DB plans were still the predominant form of retirement benefit, so that actual median net worth (broadly defined) was significantly higher than the SCF figure. By 2010, DB plan benefits were much less common, so the adjustment to SCF median net worth to reflect DB plan benefits would be smaller in 2010 than it would have been in 1989.

  4. readerOfTeaLeaves says:

    Yes, some of us understood that housing assets were inflated, and I don’t regard it as the end of the world to see a little more sanity in the housing market.

    But I completely lose patience with the failure of government to investigate, prosecute, and hold accountable rampant mortgage and securities fraud. How can any economy recover when it remains riddled with dodgy accounting, bad loans on the books, and unprosecuted, rampant criminal conduct?

    In addition to unprosecuted fraud, we seem to have politicians (in both parties) who cannot distinguish between economic parasitism and genuinely productive activities; they let themselves be bamboozled by the delusion that derivatives formulas and leverage somehow constitute legitimate economic activity (!).

    Losing money is one thing.
    Losing it to thieves and looters, while government stands by like a feckless, enabling toady is really beyond the pale.
    Then watching Global Finance game the system by using tax havens, dodgy accounting, unlimited political contributions, high frequency trading, and unregulated insurance ‘swaps’ suggests that government is no match for Global Finance.

    It used to be ‘It’s the economy, stupid.’
    That should be updated to, “It’s the criminality, stupid. Along with the failure to distinguish between economic parasitism, as opposed to genuinely productive activity.”

    This inability to distinguish between parasitism and productivity seems to be hamstringing any hopes of a sane, pragmatic policy discussion.

    When the parasites are nibbling away at the host, and the host simply asks, “How’s your dinner? Am I yummy?” it is pretty difficult to be very enthusiastic about the long term.

  5. Chris G says:

    I’d be interested to see a breakdown of the sources of net worth (and how they changed) between ’89 and ’07. For example, was the increase essentially all due to increasing home values? Did an increase in the number of two income households contribute? Just curious. My sense is that understanding how things changed would give a sense for how plausible different routes to recovery might be – if there are any plausible routes to recovery… (I try to be optimistic but I’m also keenly aware that there’s a beginning, a middle, and an end to everything.)

  6. Misaki says:

    >But there’s no way a shock of that magnitude would not throw our economy way off track.

    If people hadn’t been taking out home equity loans etc., their spending would not have decreased after the housing bubble ended and it would have had a minimal effect on the economy. People would continue paying the same interest payments on their mortgages regardless of whether they were “underwater”/”upside down”.

    Unemployment remains the most important issue. And of course, despite the end of the housing bubble, fewer people now think that money and wealth should be more evenly distributed than thought so in 2007.

    Job creation without government spending, inflation, or trade barriers: