You may have heard that Americans lost a lot of wealth in the first part of the great credit unwind. How much? According to a new survey from the Federal Reserve Board, Americans lost as much as 23 percent of their wealth between 2007 and 2009.
That may sound extreme, but it is close to the aggregate decline I reported on, using Fed Flow of Funds data, in 2009. At that time, it looked like somewhere between $8 trillion and $14 trillion in household net worth was lost from a peak of either $58.6 trillion or $64.4 trillion. That's a decline of either 14 percent or 22 percent.
The Fed study "Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009" [pdf] suggests that higher number was close to the mark: "The mean (median) fell from $595,000 ($125,000) in 2007 to $481,000 ($96,000) in 2009." The study is a re-interview of people who took part in a 2007 Survey of Consumer Finances, and its findings confirm at a more granular level the cumulative loss of wealth reflected in the Fed’s quarterly statistics. More than 60 percent of families lost wealth over the period; about a quarter gained wealth to small degrees.
You may find the lengthy explanations of methodology less riveting than I do, but a few points jump out:
* This recession hasn't been good for economic mobility. Although there's been plenty of movement – mostly downward – in net worth, there’s been very little change in families’ positions in wealth rankings. “[T]he most common single outcome was relatively small or no change in a family’s relative position in the distribution.” Even relative upward mobility can mean little when everybody’s getting burned. “For example, 18 percent of families whose rank in the wealth distribution improved by three to ten percentile points in fact had a decline in their wealth.”
* …But it might be good for marital stability. Households without a spouse were more likely to get hitched during the two-year period than married/partnered households were likely to split up.
* When will someone think of the rich? Relatively speaking, poor households did better over the period than wealthier households: “[I]ncome increased for families with income below the 2007 median and income fell for families with income near and above the 2007 median;” “[R]egions and age groups with the lowest median incomes in 2007 tended to experience increases in median income as well as positive dollar and percent changes;” “Families that moved up the wealth distribution by three or more percentiles tended to have lower wealth than other families;” and “There was greater variation in wealth changes for lower-income families.” (There may be some skewing because changes in wealth seem more substantial the closer you get to zero.) Again, this comports with anecdotal evidence: The difference between the Great Recession and the usual recessions is that this time even rich people got hit.
* Debt = poverty. “Across the wealth-change categories, families that moved down the wealth distribution from 2007 to 2009 by more than three percentile points tended to become more highly leveraged over this period.”
* Real estate is still the word of our undoing. “The largest percentage declines in the median values of nonfinancial assets in the SCF panel were for vehicles, primary residences and non-residential real estate.” Not surprisingly then, “losses tended to be greatest for families living in the west, a reflection in large part, of the relatively greater declines in real estate prices in that region.” Increases in real estate ownership were more than offset by increases in the share of mortgage debt. Although the decline in the equity portion Americans own of their homes is a catastrophe decades in the making, the recession accelerated this trend.
* Most of the decline came from loss of asset values rather than willful changes in the asset mix. “[T]he majority of families passively accepted changes in portfolio shares driven by changes in asset prices.” Hand up over here! In fact, I’m not even sure how you can make big changes to your mix of holdings when everything’s losing money. How can you sell when nobody’s willing to buy?
* Unemployment matters less than they want you to think. “In general, the relationship between unemployment spells and shifts of families within the wealth distribution appears weak.” Again, you read it here first.
* ...And debt matters more than they want you to think. “Median total debt increased from $70,300 to $75,600.” The ratio of total debt to assets increased in part because the assets lost value rather than conscious decisions to take on more debt. And to the extent that people did reduce debt, brute-force deleveraging doesn’t seem to have made much difference: People who were heavily leveraged in 2007 but moved up within the wealth distribution “might also include families whose principal residence had a mortgage that exceeded its value in 2007 and who had lost that home by 2009; however, the data show that this situation is a negligible element in the observed outcomes.”
* Saving is hip again. “Most families in each of the relative wealth change categories reported greater desired precautionary savings in 2009 than they had in 2007.” Certificates of deposit and retirement accounts made up a bigger portion of the asset mix in 2009, which is especially impressive considering that interest rates for consumer accounts are close to zero or negative with inflation. Of the whole asset mix surveyed, only bonds and cash-value life insurance appreciated.
* …And that’s bad news for stimulus believers. While the Fed by its nature discourages savings and both the Bush and Obama Administrations sought to spur the economy by getting people to spend stupidly, it looks like the “wealth effect” is moving in the other direction – toward fiscal caution and away from drunken sailorism: “[T]he proportion agreeing that they would spend more if their assets rose is markedly lower than the fraction agreeing they would spend less if their assets declined in value. This outcome suggests that spending responses to wealth changes may be less symmetrical than has been apparent in aggregate data.” Needless to say, the Fed sees this prudence as bad news: “The data show signs that families’ behavior may act in some ways as a brake on reviving the economy in the short run.” As recently as last Christmas, Keynesians were still hoping for a return to spending, but that didn’t really happen.
In fact, the important question is what has happened to Americans’ wealth since 2009. Real estate has obviously continued to decline, and unemployment is higher than it was at the beginning of 2009. Stock market investments have been up and down, and will be down again. You could make the case that household net worth has been essentially flat since hitting rock bottom in the beginning of 2009. We’re still worth a lot less than we were in 2007, and thanks to the Fed’s two rounds of quantitative easing, our dollars are worth less too.
So basically the only good news here is that Americans remain tough and optimistic people: “In all wealth-change groups, most families found at least something positive in their experience, and the most common response was an answer that indicated a recognition that the workers in the family had managed to keep or get a job or that their income had somehow otherwise been maintained at an adequate level.”