US family net worth crushed by financial crisis
The US Federal Reserve today released its triennial examination of incomes and net worth of American households in the Survey of Consumer Finances.Â It shows the crushing effects on net worth of a housing and financial bust unparalleled since the great depression.
The shocking results of this study overviewed in the New York Times are that ALL Â real net wealth gains for the median household since 1992 were erased by 2010.Â Net worth for the median American family plummeted from $126,400 in 2007 to $77,300 in 2010 ($2010), or 39%.Â Almost two decades of progress for middle income Americans has been expunged from history.Â Falling house prices were the primary driver of this devastating blow to household net worth. As such households with heads between 35-44 were most heavily hit. However, median debt stayed relatively constant between 2007 and 2010 showing how precarious household finances are when the assets side of net worth is based on bubble level housing prices.Â If the value of the asset side collapses, the debt side remains.
The top 10% of the income and net worth distribution saw relatively little change in their medians between 2007 and 2010, likely owing to the recovery of stock market values by 2010 from their 2009 lows.
Earnings also dropped for the median household between 2007 and 2010, although by a smaller 7.7%, compounding the loss in net wealth.
There are plenty of other factoids in the US Fed Report.Â Readers of this blog likely wonâ€™t be surprised to some degree that the housing collapse in the US had such a significant effect on the middle class.Â However, the grim details of what happened in the US should serve as a cautionary tale to us Canadians where middle class net worth is similarly premised on bubble level housing prices supported by historically high debt to income ratios, fuelled by lax mortgage insurance rules and record low mortgage rates.
Iâ€™ve said for some time, if weâ€™re not careful an American style meltdown can happen again right here in Canada.Â Weâ€™ve experienced bubbles popping before both in Toronto in 1989 and Vancouver in 1994.Â Just because the last time it happened was almost 20 years ago, doesnâ€™t mean it wonâ€™t happen again in the near future with devastating impacts to the middle class and driving a further wedge between the rich and the rest of us.
Although I am not an economist nor have I pored over the statistics, my understanding is that it’s too late for the “if we’re not careful” warning in your last paragraph. As per Steve Keen’s explanation, private debt has been permitted to take the Minsky Journey, and all that awaits is our turn at a Minsky Moment before we join the rest of the developed world in re-discovering feudal kingdom level income inequality.
I’ve seen a number of people suggest the only reason the Vancouver bubble in particular hasn’t already gone down is support from Asian buyers and speculators. Typically, they have meant this as an argument that with the growing wealth in China, the bubble is likely to be sustained for some time.
But with the Chinese economy slowing and the prospect of their exports to the Eurozone grinding to a standstill as the European economies founder, that particular bet may soon be off.
I suspect it is more than just China.
Canada has shared with Australia being known as a commodity currency and therefore a safe haven for capital. When central banks are printing and debasing the currency there is typically a jump in commodity prices to reflect the debasement. Producers have pricing power and investing in a country such as Canada or Australia has been a means of protecting capital.
There is much conflicting information on the degree to which foreign investment has helped propel the CDN housing sector. Some folks think foreign money has minor effect. A recent Globe & Mail article stated that condo vendors have entire teams dedicated to marketing to foreign owners; they would not have such teams if foreign investment was a minor factor.
It appears to be true that Canada lacks a mechanism to track foreign investment in property markets so as to determine the size, scope and impact of that investment. If there is significant foreign investment then Canadians are being priced out of their own housing markets due influx of foreign capital.
And our Minsky moment will arrive with sudden vengance if foreign investors current favourable perception of Canada as a safe haven changes.
Actually existing capitalism’s American dream and the life of a happy middle class seems to me more than a housing bubble. The end was the bursting of the bubble, but the means to get there is what is never discussed in the media. It is so much more than just overzealous mortgage lenders.
Ultimately the housing bubble’s collapse rests upon a very Polanyi like self- regulating path to internal destruction of all that propped capital up in its effort to find a new center of gravity after the post war stability due to growth of rebuilding. The new deal and the growth of unionism, the widespread Keynesian economics, the Marshal plan many factors were all brakes and regulatory mechanism, (the double movement) that augmented the internal contradictions.
So yes, like a straw house of cards, the housing bubble that burst across quite a few countries, was the final collapse of all that kept the neo-liberalism friendly with the middle class. In many ways, I view it as the fall of the Berlin wall, and the collapse of the USSR.
I do think we need a new book from Mr. Fukuyama, apparently as I wrote back then in a grad school course of his book the End of History and the Last Man, we are actually at the Beginning of History and the Final Gasps of Barbarism.
How could anybody conclude that Capitalism as it actually existed then and now, was the final history?!
Truly we are still quite barbarian in terms of allowing the financialization of the economy and the shadow banking system to transcend everything into massive economic powerhouses and like the classical hordes roam the civilized world global economy, and pillage the world social order- destroying everything and building nothing- these financiers would have made Genghis Khan weep with envy. Quite the electronic stallions they have.
Truly what else, given our economic history, could we have expected, when given the flight that capital had? At best Restrained Barbarism?
And I should importantly add- the flight that capital still has! And now without a net! Watch the crash next time- it will be very disturbing.
Ahhh my machine learning courses are keeping me from my labour studies and comments on this blog.
I am in the midst of a grad course in Machine Learning, 20,000 Polynomial linear regressors with a dialed up regularization using programmed gradient descent and controls on bias will learn you some interesting data. And then hook up those outputs to a back propagating neural network with a couple of hidden layers using regularized logistic regression to train the activation functions. I think I just am a numbers guy after all. I am still having this debate.
Labour economics just do not pay the bills! Sadly- so it looks like the world of machine learning is pulling me away into its grasps.
Comments will be fleeting at best.
Huh. Mucking about getting machines to learn . . . be nice if we could overcome people’s resistance to doing so.
I have no quibble with your general position. The USSR was hardly a paradise–but its mere existence as an alternative kept the capitalist bosses less dishonest. As soon as they felt they had a monopoly, there was no reason to make the system work for the masses any more, or leave money “on the table” that they might have been hoovering up out of the pockets of the less privileged. History since then has been basically about the concerted efforts of capitalists to grab back the loot they’d been reluctantly using to mollify the middle class, and the resulting shift back towards 19th-century poverty and instability patterns . . . except there are fewer and fewer untapped markets and untapped hinterlands to start exploiting, with which to offset such instability. Gonna be interesting times.
A new poem I am dedicating to the death of the middle class.
Aliens in My night club
I dream often at night
in the seclusion of my subconscious,
of the work hammers that hit me all day long,
It hurt for the first 5 years,
But for the last 10 years my dreams,
enjoy the pain.
Addicted to its definition,
I would be lost without it.
So For all the aliens out there,
I swung my night club!
Come on in and dance,
Let me deliver you some pain-
you will enjoy it.
But first buy this pill.
It lights up the pathway.
By Paul Tulloch 2012