AMERICANS SAW WEALTH PLUMMET 40 PERCENT FROM 2007 TO 2010, FEDERAL RESERVE SAYS
June 12, 2012 2 Comments
By Ylan Q. Mui | The Washington Post
The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with middle-class families bearing the brunt of the decline.
The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992.
The data represent one of the most detailed looks at how the economic downturn altered the landscape of family finance. Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross.
The findings underscore the depth of the wounds of the financial crisis and how far many families remain from healing. If the recession set Americans back 20 years, economists say, the road forward is sure to be a long one. And so far, the country has seen only a halting recovery.
“It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics. “We were in free fall.”
The recession caused the greatest upheaval among the middle class. Only roughly half of middle-class Americans remained on the same economic rung during the downturn, the Fed found. Their median net worth — the value of assets such as homes, automobiles and stocks minus any debt — suffered the biggest drops. By contrast, the wealthiest families’ median net worth rose slightly.
Americans have tried to rebalance the family budget but have found it difficult to reverse the damage.
The survey showed that fewer families are carrying credit card balances, and those who do have less debt. The median balance dropped 16 percent, from $3,100 in 2007 to $2,600 in 2010. The Fed also found that the percentage of Americans who have no debt rose to a quarter of families.
But that progress was undermined by other factors, leaving the median level of family debt unchanged. The report said more families reported taking out education loans. Nearly 11 percent said they were at least 60 days late paying a bill, up from 7 percent in 2007. And the percentage of families saddled with debts greater than 40 percent of their income stayed the same.
Not only were Americans still facing significant debts, but they were making less money. Median income fell nearly 8 percent, to $45,800, in 2010. The median value of stock-market-based retirement accounts declined 7 percent, to $44,000.
But it was the implosion of the housing market that inflicted much of the pain. The median value of Americans’ stake in their homes fell by 42 percent between 2007 and 2010, to $55,000, according to the Fed.
The poorest families suffered the biggest loss of wealth from the drop in real estate prices. But middle-class Americans rely on housing for a larger part of their net worth. For some, it accounts for just more than half of their assets. That means every step downward is felt more acutely.
Rakesh Kochhar, associate director of research at the Pew Hispanic Center, calls this phenomenon the “reverse wealth effect.” As consumers watched the value of their homes rise during the boom, they felt more confident spending money, even if they did not actually cash in on the gains. Now, the moribund housing market has made many Americans wary of spending, even if their losses are just on paper.
According to the Fed survey, that paper wealth — or what is officially called unrealized capital gains — shrank 11 percentage points, to about a quarter of Americans’ assets.
The findings track research Kochhar released last year that showed a dramatic drop in household wealth during the recession, particularly among minorities. That study found record-high disparities between whites’ wealth and that of blacks and Hispanics.
“It was turning the clock back quite a bit,” Kochhar said.
The Fed’s survey is conducted every three years. Although there have been some signs that the recovery has picked up — housing prices have begun to stabilize and unemployment has fallen — Fed economists said those improvements largely do not change the survey results.
“Recovery from the so-called Great Recession has also been particularly slow,” the report said.
FEDERAL RESERVE REPORT SHOWS FINANCIAL CRISIS HAS THROWN BACK UNITED STATES FAMILIES 20 YEARS
The financial crisis of the past four years has thrown American families back two decades, according to figures provided by the Federal Reserve Board in its triennial Survey of Consumer Finances.
The median net worth of US families—the combined value of homes, bank accounts and other assets, minus mortgages and other debts—fell 38.9 percent between 2007 and 2010, from $126,400 to $77,300, approximately the level recorded in 1992. Median income also fell over the three-year period, down 7.7 percent before taxes, adjusting for inflation.
Credit: Lam Thuy Vo
The survey, based on interviews conducted in 2010 and early 2011, understates the impact of the ongoing economic slump, which has continued since then. Its figures on the distribution of wealth and income lag behind even more, since there has been a substantial rebound in the position of the wealthiest US households because of soaring corporate profits and rising stock prices.
Nonetheless, the clinically written 80-page document released Monday paints a devastating picture of the impact of four years of financial crisis and economic slump on working class families.
Some of the findings are like the tips of so many icebergs: they give only the barest glimpse of the profound suffering and exploitation experienced by tens of millions of people struggling to survive:
- Nearly two-thirds of all young families—those headed by someone under 35—owed installment payments on education debt, up from 53 percent in 2007.
- The proportion of families making use of so-called payday loans rose from 2.4 percent in 2007 to 3.9 percent in 2010, an increase of 65 percent.
- More than 10 percent of families with a 401(k) or other retirement account in 2007 had been compelled to liquidate it by 2010.
- The value of small businesses fell by an average of 20.5 percent from 2007 to 2010, with the steepest fall in the West and Northeast.
- Families headed by someone 75 or older sharply increased their use of credit card borrowing and carried larger balances.
- The proportion of families that reported they had been able to save any money during the previous year fell from 56.4 percent in 2007 to 52 percent in 2010.
Each one of these data points deserves exploration. In each case, investigation would illuminate an area of American social life ignored by the media and the candidates of the corporate-controlled Democratic and Republican parties.
The headline number of the Fed report, and deservedly so, is the dramatic fall in median net worth. This is the byproduct of the housing collapse, which has devastated the principal asset of working class and middle class families.
The median value of a US home fell by 42 percent between 2007 and 2010, from $95,300 to $55,000. At the same time, the burden of mortgage debt actually rose, from 51.3 percent of median home value to 64.6 percent, and 11.6 percent of homeowners with mortgages were under water, owing more on their homes than their present value.
In terms of income groups, the bottom 25 percent of households experienced a decline of 100 percent in median net worth, from a miniscule $1,300 per household in 2007 to zero in 2010. The second and third quartiles of the population saw decreases of 40 to 50 percent, while median net worth for the top 10 percent fell by only 6.4 percent (and has risen considerably since the end of 2010).
In other demographics, the biggest drops came in the West, the focal point of the housing collapse, where median net worth plunged 55.3 percent; for families headed by someone 35 to 44 years old, (down 54.4 percent); and for workers in white collar technical, sales or service occupations (down 57.7 percent).
The report details the enormous efforts by working people to survive financially by making sacrifices and cutting back on expenditures. Fewer families are carrying credit cards, the proportion carrying a balance dropped from 46.1 percent to 39.4 percent, and the median balance on those cards fell 16 percent from 2007 to 2010. Despite ever-greater repayments, however, debt as a percentage of family assets actually rose, from 14.8 percent to 16.4 percent, and the proportion of families behind on paying bills increased substantially.
In sum, these figures document a vast social retrogression, in which the financial position of the overwhelming majority of the American people is getting worse. This is not merely the result of impersonal economic processes, however. It is the direct consequence of decisions made in corporate boardrooms and in Washington that have exclusively benefited the super-rich at the expense of working people.
The Bush and Obama administrations and the Federal Reserve itself made countless trillions in public funds available to bail out the banks and billionaire investors, whose speculative manipulation drove the mortgage bubble and resulted in the greatest financial collapse since 1929. By comparison, only derisory sums were offered to hard-pressed homeowners faced with foreclosure, and not a penny has been allocated to directly create jobs for the tens of millions of unemployed.
The social crisis, which is today even deeper than in 2008, is a demonstration of two interconnected failures: the failure of capitalism as an economic system, and the failure of the two-party system, which is incapable of responding in any way to the growth of mass deprivation on a scale not seen since the 1930s.
THE MOST IMPORTANT STORY IN AMERICA: FAMILY NET WORTH COLLAPSES 40% IN THREE YEARS
Henry Blodget | Business Insider
June 12, 2012
The report included a lot of depressing data about the financial situation of average Americans. But nothing was so shocking and depressing as this:
- The median net worth of American families dropped nearly 40% from 2007 to 2010.
(Yes, the situation has improved in the 18 months since 2010, but only modestly. House prices are about where they were back then.)
Most of this decline came from the collapse of the housing market. But we can’t just write this one off to the housing bubble. The median net worth of households has now fallen to the same level as it was two decades ago, in 1992.
What does that mean?
It means America just isn’t working right now.
Not just Americans. America itself, a country whose economy once worked for almost everyone.
In the old America, if you worked hard, you had a good chance of moving up.
In the old America, the fruits of people’s labors accrued to the whole country, not just the top.
In the old America, there was a strong middle class, and their immense collective purchasing power drove the economy for decades.
Over the past couple of decades, the American economy has increasingly mostly worked for the richest Americans, at the expense of everyone else. As a result, the disparity between “the 1%” and “the 99%” has hit a level not seen since the 1920s. And there is a widespread and growing sense that life here is not fair or right.
The middle class–the average American families–drive most of the spending in this country. Thus, when the middle class suffers, the whole economy suffers. And, right now, America just isn’t working for the middle class.
If we are to get this country headed in the right direction again, we need to fix this problem. We can start by appreciating how bad it is.
First, the “money shots” from the Fed’s recent survey of consumer finances. The median income for American families dropped sharply from 2007-2010.
Survey Of Consumer Finances
Median family net worth, meanwhile, has collapsed.
Survey Of Consumer Finances
Yes, the housing bubble contributed to the 2007-2010 drop. But unless the housing bubble reinflates, that net worth isn’t coming back. And house prices are just now getting back to normal.
And, meanwhile, we have other problems to worry about. Like unemployment.
Unemployment’s coming down slowly. But we still have miles to go. We haven’t yet recovered even half of the jobs we lost in the recession.
Put differently, a lower percentage of Americans are working than any time since the early 1980s (And the boom prior to that, by the way, was from women entering the workforce).
Meanwhile, the richest Americans are doing great.
Corporate profits just hit another all-time high.
Corporate profits as a percent of the economy also just hit an all-time high. Profits are now VASTLY higher than they’ve been for most of the last half-century.
If corporations are doing so well, everyone who works for them should be doing great, right? Wrong. The folks who are doing well are at the top. CEO pay is now 350X the average worker’s, up from 50X from 1960-1985.
CEO pay has skyrocketed 300% since 1990. Corporate profits have doubled. Average “production worker” pay has increased 4%. The minimum wage has dropped. (All numbers adjusted for inflation).
After adjusting for inflation, average hourly earnings haven’t increased in 50 years.
In short … while CEOs and shareholders have been cashing in, wages as a percent of the economy have dropped to an all-time low.
In other words, in the struggle between “labor” and “capital,” capital has basically won. (This woman lives in a tent city in Lakewood, New Jersey, about a hundred miles from Wall Street.)
Of course, life is great if you’re in the top 1% of American wage earners. You’re hauling in a bigger percentage of the country’s total pre-tax income than you have at any time since the late 1920s. Your share of the national income, in fact, is almost 2X the long-term average!
And the top 0.1% in America are doing way better than the top 0.1% in other first-world countries.
It wasn’t always this way … From 1917 to 1981, the bottom 90% of wage earners in this country (blue) captured 69% of the total wage growth. The richest 10%, meanwhile, got 31% of the wage gains.
Between 1981 and 2008, however, things changed. The richest 10% grabbed 96% of the income gains in those years, leaving only 4% for the bottom 90%.
And from 1997-2008, things got grossly unfair. ALL of the wage gains went to the top 10%. The wages of the bottom 90%, meanwhile, declined.
In fact, income inequality has gotten so extreme here that the US now ranks 93rd in the world in “income equality.” China’s ahead of us. So is India. So is Iran.
And, by the way, few people would have a problem with inequality if the American Dream were still fully intact—if it were easy to work your way into that top 1%. But, unfortunately, social mobility in this country is also near an all-time low.
So what does all this mean in terms of net worth? Well, for starters, it means that the top 1% of Americans own 42% of the financial wealth in this country. The top 5%, meanwhile, own nearly 70%.
That’s about 60% of the net worth of the country held by the top 5% (left chart).
And remember that huge debt problem we have—with hundreds of millions of Americans indebted up to their eyeballs? Well, the top 1% doesn’t have that problem. They only own 5% of the country’s debt.
And then there are taxes … It’s a great time to make a boatload of money in America, because taxes on the nation’s highest-earners are close to the lowest they’ve ever been.
The aggregate tax rate for the top 1% is lower than for the next 9%—and not much higher than it is for pretty much everyone else.
As the nation’s richest people often point out, they do pay the lion’s share of taxes in the country: The richest 20% pay 64% of the total taxes. (Lower bar). Of course, that’s because they also make most of the money. (Top bar).
In short, America just isn’t America anymore.