For those looking for a crisis, look no further. Americans have rebuilt less than half of wealth lost to the 2008 recession, according to the Federal Reserve. A paltry few media outlets covered a study from the St. Louis Fed released on May 30 which found that American households have rebuilt less than half of the wealth lost during the recession, leaving them without the spending power to fuel a robust economic recovery. To its credit, the Washington Post was willing to share this bad news with the world.
From the peak of the boom to the bottom of the bust, households watched a total of $16 trillion in wealth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth, according to the report.
Sadly, the report showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker.
“A conclusion that the financial damage of the crisis and recession largely has been repaired is not justified,” the report stated. Ominous words indeed. The impact is especially tough for households were not well educated, relatively young or black or Hispanic, or some combination of those characteristics. Those families tended to have low savings combined with high debt and accrued much of their wealth through housing.
The report is notable in that it echoes the warnings published for the last few years by many notable economists. Nobel-winning economist Joseph Stiglitz has been saying for years that the earning inequity in the U.S. was a well-established and very destabilizing development over the past forty years, with the 2008 recession accelerating this worrisome trend. Just recently, he recapped his concerns with even more dire findings. High-profile economist Paul Krugman has been beating the same drum beat as Stiglitz. His 2010 Princeton University presentation summarizes his findings and is essential reading. If reading isn’t your bag, a 6-minute Politizane video summarizes the numbers graphically — and in graphic detail.
The Census Bureau data has been mined by the Pew Research Center and it struck a toxic lode: the 2008 recession eroded the net worth of 93% of U.S. households. One major reason: housing prices. Noted economists Karl Case, John Quigley and Robert Shiller found in a 2012 study that an unexpected 1 percent drop in housing prices caused a permanent 0.1 percent decrease in spending. But a similar 1 percent rise in housing prices boosted consumer spending by only 0.03 percent. In sum, the decline in housing prices and housing construction have imposed a $600 billion hit on the nation’s economy that far exceeds impacts of stock market values.
The Fed Reserve study is part of a growing body of research on the role of household wealth — or lack thereof — in amplifying the impact of the recession and slowing the rate of recovery. Traditionally, economists and policymakers have focused on the effects of employment and income. But the report from the St. Louis Fed is one of the few official government acknowledgements that swings in household balance sheets — which include home values, stock prices, savings and debt — were critical in determining which families weathered the financial storm and which got swept away.
Here’s an equally sobering point: The Federal Reserve study also found that wealth accumulation not only impacts families’ current financial status but also their prospects for future economic success. The report points to studies that connect savings to the likelihood of attending and completing college and economic mobility. You can apply whatever descriptor you want to this crisis: inequality, unemployment, economic, deep do-do. But when future generations look back at the 2008 “Great Recession”, they will wonder what the hell we were thinking as we silently stood by as we watched our economic Titanic sink.