Recessions Are Nature’s Way of Keeping the Little Guy Down
Or: Yes, The Rich Really Are Different
You’ve all probably seen the depressing reports from the newly issued 2010 edition of the Fed’s triennial Survey of Consumer Finance, in particular the 39% drop in median household net worth, ’07-’10.
Here’s a picture (click for larger):
The well-off have done fine. In the greatest economic downturn in eighty years, their median net worth went up.
This doesn’t even touch on the top 1%, .1%, or .01%, of course. It’s very hard to calculate net worth for those folks as a group. But judging by their incomes, they’re doing just fine too:
I can’t comprehend how anyone can play word games about “incentives” to suggest that this situation, created quite intentionally over the past three decades, is or could be conducive to widespread national prosperity.
I can only assume that those who do so don’t actually care about widespread national prosperity.
Cross-posted at Asymptosis.
So when does Obama, the purported “Socialist” come out again and say the Wall Street guys are so highly paid “because they’re like professional athletes”?
Hilarious how the corporate media portray the Romney-Obama horse race as though there are real policy differences there outside of a few Culture War wedge issues. And sad the way a majority of the brainless American public actually *believes* this horse$hit.
Sheldon Adelson just gave $10 million to Romney’s super PAC. As a percentage of wealth, I estimate that’s about what I have in my wallet at the moment. But I need that money more than he needed his, so I think he’s being awfully cheap so far. He’s dedicated to fighting against taxes on the wealthy, so eventually he may consider really openning his checkbook–what could be more fun than to tear Obama apart by using some of the BILLIONS of dollars he’s accumulated just since Obama enterred office?
Pretty much by definition it can’t contribute to “widespread” prosperity.
What I take away from this very helpful chart is that home-ownership promotion policies were drove virtually all of BOTH the rise and fall of middle class net worth. Suggesting it would be a better idea to reduce those and find other vehicles to boost that net worth.
Pretty much by definition it can’t contribute to “widespread” prosperity.
What I take away from this very helpful chart is that home-ownership promotion policies were drove virtually all of BOTH the rise and fall of middle class net worth. Suggesting it would be a better idea to reduce those and find other vehicles to boost that net worth.
What about the equalization between 2001 and 2004? And under a Republican admininstration! What happened?
What about the equalization between 2001 and 2004? And under a Republican admininstration! What happened?
What about the equalization between 2001 and 2004? And under a Republican admininstration! What happened?
Steve,
That looks like a chart of the bubble in housing prices from 2001 to 2010. Middle class has much more of its net wealth tied to their homes than the rich. Thus the big increase until the bubble popped….
So tell me again the purpose of the rant? People got ‘rich’ based on infalted housing, when reality struck they reverted back to the mean (which is still going on in some places). I thought this was a reality based blog?
Islam will change
buff:
Income:
– Reduced tax rates for payroll earnings if they had any at the ether levels.
– Reduced tax rates on capital gains which is much of the gain for those higher incomes.
– Lower inheritance taxes so they can keep more of the estates and roll them over
– etc.
Maybe I am missing your point? When mortgage rules were modified and made it easier to get to equity, the middle income brackets were able to draw down their home equity in the form of loans or in refinancing which may be closer to the point you are trying to make.
@Min: What Mark and buffpilot say. Home prices were the primary drivers of both the up and the down. The top 10% has a much smaller proportion of its wealth in their homes.
I’m looking forward to doing a longer-term view when the Fed releases the whole 2010-dollar-designated data set this summer. (I *could* do the inflation adjustment myself on the 2007-dollar-designated data, but I think it’s best to let the pros do that one.)
@buff: The purpose of this rant is to point out that the whole financial ecosystem as constructed over the last thirty years — and as unfortunately largely continued under Obama — yields this result. Many details, but the big picture is here.
Has anyone crunched the data to break down the lost net wealth for the median household? Home equity must be a big part of this loss, but how much is attributable to other losses? (For example, with so many newly unemployed and underemployed people, I’d think many people spent savings.)
I don’t know about nature’s way
but you don’t have to be much of a conspiracy theorist to see it as the Fed’s way. By controlling the money supply and interest rates, they control “growth” and recession. And even if they are honest, they still end up favoring banks and high income people while the workers take the “pain” of all their fixes to inflation.
this has been going on a lot longer than there has been a Fed. in fact the Fed was created to mitigate the boom-bust caused by “natural” fluctuations in money supply. sometimes, as in 1981-82, it has made the problem worse.
and it doesn’t take much imagination to see how boom-bust ends up sucking in money from poorer people only to shake them upside down with the occasional crash.
so, yes, a little paranoia might be a useful guide to economics.
oh… note for Buff mostly
by changing interest rates the Fed moves more money from your pocket than any taxes devised by the evil Democrats ever did. (you would need to factor in the effect of interest rates on “the economy” to fully understand this.)
PJR,
Lost net wealth from when? If you took it from the top of the bubble to now, there is a lot of loss. People who did not join the housing roller-coaster (or were lucky like me) probably did OK. Its the people who bought at the top, are underwater big time, that are the ones hurting so much. If you buy at teh bubble top you will be fleeced…
Islam will change
Like a defined benefit pension plan? Or a perhaps a living wage?
@buff:
Just responding to the tone here, I’d say:
http://www.asymptosis.com/you-deserve-it-part-243.html
@coberly: changes in inflation rates are equally or more profound. I’ve said it before too many times: An unexpected 1% increase in inflation transfers hundreds of billions of dollars in buying power from creditors to debtors. Every year. Enough to get a fed governor’s attention…
Steve,
First – sorry for the snark in my first response. I just didn’t understand why you didn’t point that this was all housing bubble related from the start.
Second – Life is tough. Its tougher if your stupid.
At the link: John and James neither deserved it. (The 1 comment is also instructive). If you were born Jewish in 1935 in Poland you and your family probably died. If you were born in Jewish in 1935 New York you didn’t. Bad luck, lack of information, and unable to fathom the evil coming from Germany kills the first family. Ignorance can get you killed, but they obviously did not ‘deserve’ it.
In the housing situation, unlike my hypothetical Jewish family, you had a plethora of information and plenty of time to make a decision. And this for the usually largest economic decision a family makes.
The bottom line is simple – if you bought at the height of the bubble, you are going to take a huge hit financially becuase of making that poor decision. In the example at the link James probably did not do his homework on what houses should cost and bought well past the 2.5-3.0 ratio between your take home pay and what you should buy a house for. He did not do his due diligence – and the internet was right there in front of him.
John probably didn’t either, but got lucky and came out OK. If you are unwilling to spend time and effort in understanding the economics behind making such a huge purchase then you are basically betting on luck that you will survive. At least James can get rid of his debt by BK, unlike the fools taking on $100K undischargable debt to go to college.
That does not mean either ‘deserved’ it in any morale state. They didn’t. But a lot of people avoided the housing bubble by doing their due diligence and deciding to rent. Others figured out the bubble and rented also. Still others, like me, happened to get lucky and sell at the top of the bubble and move to a non-bubble state (Texas-except for parts of Austin). I no more deserved my windfall as the couple who bought my house deserved the $100K + loss when they sold in 2009.
Sometimes luck falls your way. Other times it doesn’t. But anyone who bought in 2004-2006 in the bubble areas really can’t say they did any research at all. And it was available at the touch of a keyboard. I figured it out as I was selling in DC in early ’06.
I’d like to say one more time. No one ‘deserved’ it. Nor did people who lost everything in the dot-com implosion. Nor did the military guys who were taking $20-30K to closing when they moved away from DC in 1993-4. Sometimes you get a break, other times you get hosed.
But you can’t complain if you don’t do your homeowrk and get burnt. And the housing bubble was unsustainable and will fall back to the historical trend lines. This time is NOT different.
Islam will change
Steve,
First – sorry for the snark in my first response. I just didn’t understand why you didn’t point that this was all housing bubble related from the start.
Second – Life is tough. Its tougher if your stupid.
At the link: John and James neither deserved it. (The 1 comment is also instructive). If you were born Jewish in 1935 in Poland you and your family probably died. If you were born in Jewish in 1935 New York you didn’t. Bad luck, lack of information, and unable to fathom the evil coming from Germany kills the first family. Ignorance can get you killed, but they obviously did not ‘deserve’ it.
In the housing situation, unlike my hypothetical Jewish family, you had a plethora of information and plenty of time to make a decision. And this for the usually largest economic decision a family makes.
The bottom line is simple – if you bought at the height of the bubble, you are going to take a huge hit financially becuase of making that poor decision. In the example at the link James probably did not do his homework on what houses should cost and bought well past the 2.5-3.0 ratio between your take home pay and what you should buy a house for. He did not do his due diligence – and the internet was right there in front of him.
John probably didn’t either, but got lucky and came out OK. If you are unwilling to spend time and effort in understanding the economics behind making such a huge purchase then you are basically betting on luck that you will survive. At least James can get rid of his debt by BK, unlike the fools taking on $100K undischargable debt to go to college.
That does not mean either ‘deserved’ it in any morale state. They didn’t. But a lot of people avoided the housing bubble by doing their due diligence and deciding to rent. Others figured out the bubble and rented also. Still others, like me, happened to get lucky and sell at the top of the bubble and move to a non-bubble state (Texas-except for parts of Austin). I no more deserved my windfall as the couple who bought my house deserved the $100K + loss when they sold in 2009.
Sometimes luck falls your way. Other times it doesn’t. But anyone who bought in 2004-2006 in the bubble areas really can’t say they did any research at all. And it was available at the touch of a keyboard. I figured it out as I was selling in DC in early ’06.
I’d like to say one more time. No one ‘deserved’ it. Nor did people who lost everything in the dot-com implosion. Nor did the military guys who were taking $20-30K to closing when they moved away from DC in 1993-4. Sometimes you get a break, other times you get hosed.
But you can’t complain if you don’t do your homeowrk and get burnt. And the housing bubble was unsustainable and will fall back to the historical trend lines. This time is NOT different.
Islam will change
@buff:
50% of people, by definition, have an IQ below 100. Given that, I don’t think it’s valid to say “you could figure it out.” I don’t think any of us here can even begin to comprehend what it would be like to go through life — even make it through high school — in the complex world we inhabit, with an IQ of 80 or 90. That’s the first piece of luck — the lucky sperm contest. They continue from there.
Complain if the luck doesn’t go your way? No. Build a world where just moderately bad luck, the common kind that a majority of people run into in their lives, doesn’t totally fuck them? Yeah.
Reports suggest that the median household net wealth decline is about 60% home equity and 40% other wealth. If anybody has data, that would be nice. This other wealth decline for the median household seems large and, I suspect, probably reflects the use of savings and retirement accounts to replace lost income (to pay the rent, buy food, get medical care, etcetera) rather than a loss of “paper wealth” based on estimated resale values. Arguments about people making bad/unlucky investment decisions are mostly irrelevant to this type of wealth drawdown, which was caused by an economic catastrophe and, in some cases, poor government responses (like firing people).
Talk about stimulus! 😉
Talk about stimulus! 😉
Talk about stimulus! 😉
steve
i did not specify a direction. yes about inflation. the Fed is usually on the side against inflation. sometimes longer than it needs to be.
Buff
I don’t know what you do for a living, but even some of us with high 1.q.’s “have other things to think about.” and sometimes we need to buy a house when we need to buy it and have no way to guess whether the market is going to go up or down. and wouldn’t really care if we didn’t have to move again in two years.
frankly i think your soul is in danger if you dismiss all the hardship that is caused to people by forces outside their control as “being stupid.”
[as it happens i have been very lucky in my purchases of houses and stocks. my daughter has been very unlucky. now the truth is, she is smarter than i am.]
Steve,
Moderately bad luck is not buying a $200K house for $500K at the top of the bubble. There is no bad luck there.
Bad luck is not buying a $400K house with a no-down, liar loan, then getting the house appraised for $600K, taking a HELOC on it, and blowing the $200K on trips around the world. No bad luck there.
Bottom line of the housing bubble – people were greedy. They didn’t do there homework and bought high. Now that the asset is dropping back to the historic mean they want someone to bail them out. Sorry, send the money to the people who were smart and rented or bought modest houses they could afford.
Moderately bad luck can be mitigated easily by living below your means, working hard and saving. heck if you follow 3 simple prescriptions its almost impossible to be poor in the US.
1) Avoid all interactions with the law – no drugs, no theft etc
2) No kids until your married
3) Don’t get married until you 25 and stay married
Plenty of places in the US were you can live decent healthy lives on very little. Living in a high cost of living area is a choice not a right. It works for IQ 80 just as much as IQ 120.
I sound calloused but I watched to many junior enlisted make it without any problems on a salary (even with benefits) that make a Starbucks Barrista look well paid.
I also have no problems with the social safety net. But class mobility means you can go up AND DOWN. As PJR points out, lots of people used savings to keep up appearences. They burned their capital to avoid the loss of their ‘station’ in life, if you will. Makes the fall even harder when it happens. Sometimes you have to downsize…and people don’t like it – I know. But its not the job of the government to ensure class mobility can only go one way.
We have a system, right now, that basically lets people survive bad luck, heck it even helps people who have horrendous luck – like the family that just losy everything in a tornado. But the system does not stop people who make very poor decisions, taking high risk intentionally, from getting wiped out. And shoudln’t.
Or do you really beleive peopel making $60K should be buying houses worth $500K with 0 downpayment? Or was that just “moderately bad luck”?
Islam will change
buff
i could agree with most of this. where you go wrong i think is generalizing from the kind of cases you describe here to the idea that everyone who suffers suffers from the kind of greed-and-stupidity you describe. plenty of that going around. but it affects the rest of us even when we are not greedy or more than ordinarily stupid. (which is to say not both crafty and lucky with money.)
On IQ and getting through high school.
Yes, an IQ of 100 is average. At first, it was based on 13 year olds. (As in, “a mental age of 13”.) A lot of people got no more schooling than 8th grade. Were people with an IQ of 100 capable of graduating from high school? My guess is probably, but for one reason or other they did not go.
My guess is that high school was somewhat harder back then than now. (I have seen some of my grandmother’s text books. ;)) And, by the Flynn Effect, a person with an IQ of 100 today would have scored above 125 or 130 back then. So I expect that a person with an IQ of 100 today would, given the opportunity, be able to get an associate degree or maybe even a baccalaureate.
Moi, I think that we should make high school harder again. But that is just my opinion.
On IQ and getting through high school.
Yes, an IQ of 100 is average. At first, it was based on 13 year olds. (As in, “a mental age of 13”.) A lot of people got no more schooling than 8th grade. Were people with an IQ of 100 capable of graduating from high school? My guess is probably, but for one reason or other they did not go.
My guess is that high school was somewhat harder back then than now. (I have seen some of my grandmother’s text books. ;)) And, by the Flynn Effect, a person with an IQ of 100 today would have scored above 125 or 130 back then. So I expect that a person with an IQ of 100 today would, given the opportunity, be able to get an associate degree or maybe even a baccalaureate.
Moi, I think that we should make high school harder again. But that is just my opinion.
On IQ and getting through high school.
Yes, an IQ of 100 is average. At first, it was based on 13 year olds. (As in, “a mental age of 13”.) A lot of people got no more schooling than 8th grade. Were people with an IQ of 100 capable of graduating from high school? My guess is probably, but for one reason or other they did not go.
My guess is that high school was somewhat harder back then than now. (I have seen some of my grandmother’s text books. ;)) And, by the Flynn Effect, a person with an IQ of 100 today would have scored above 125 or 130 back then. So I expect that a person with an IQ of 100 today would, given the opportunity, be able to get an associate degree or maybe even a baccalaureate.
Moi, I think that we should make high school harder again. But that is just my opinion.