[Vision2020] Why middle class has taken a big hit

[Art Deco]

Why middle class has taken a big hit
By *Dean Baker*, Special to CNN
updated 11:25 AM EDT, Wed June 13, 2012
*
*

*Editor's note: Dean Baker, an economist, is co-director of the Center for
Economic and Policy Research <http://www.cepr.net/>, a progressive economic
policy organization. He is author of "The End of Loser Liberalism: Making
Markets Progressive."<http://www.cepr.net/index.php/publications/books/the-end-of-loser-liberalism>
*

*(CNN)* -- The Federal Reserve's newly released Survey of Consumer Finances
confirmed what most of us already knew: The middle class has taken a really
big hit.

Between 2007 to 2010, the typical family had lost nearly 40% of their
wealth<http://money.cnn.com/2012/06/11/news/economy/fed-family-net-worth/>.
And, despite that our economy was 15% larger in 2010 than in
2001<http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?pr.x=87&pr.y=16&sy=2001&ey=2010&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=NGDP_R&grp=0&a=>,
the typical family's wealth decreased by 27.1% since
2001<http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf>.
On top of that, income had fallen. Median family income in 2010 was down by
7.7% from its 2007 level and 6.3% from its level a decade ago.

The picture looks dismal, doesn't it? But none of these numbers are
surprising really. Is the average American poorer than before? Yes.
 [image: Dean Baker]
Dean Baker

The Fed's survey is picking up on the huge effect of the collapse of the
housing bubble. For many middle class families, their home is by far their
largest financial asset. For decades, people were encouraged to believe
that it was the safest way to save for retirement or other purposes.

This clearly was not true when house prices became inflated. In the years
when the bubble reached levels that were clearly unsustainable, from 2002
to 2007, housing was just about the worst possible place to keep wealth.

Unfortunately, tens of millions of Americans listened to experts such as
former Federal Reserve Chairman Alan Greenspan, who assured the country
that there was no housing bubble. According to reports, Greenspan has a
very nice pension and a job that pays more than $1 million a year. He
certainly doesn't have to worry like the typical American family.

It is difficult to read through the Fed survey and not get angry at the
wreckage from a completely preventable disaster.

American families: How are you coping?
<http://ireport.cnn.com/topics/797214>

Greenspan could have used his enormous stature to warn of the dangers of
buying overvalued houses. He could have warned lenders of the risks of
issuing mortgages on overvalued property. And he could have used the
massive research capacities of the Fed to document without question the
existence of a bubble and the damage that its collapse would cause.

He also could have used the Fed's regulatory power to crack down on the
epidemic of mortgage fraud that the FBI had highlighted as early as 2004.

If Greenspan had acted responsibly and taken some of these steps, as some
of us have urged at the
time<http://www.cepr.net/index.php/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/>,
the housing bubble could have been contained before it was too late. But if
all else failed, he could have raised interest rates. To make interest rate
hikes more effective, he could have told the markets that he was explicitly
targeting the bubble. For example, he could have promised to raise rates
until nationwide house prices fell back to their 2000 level.

Greenspan's failure is history now, but we should demand that the Fed take
asset bubbles more seriously in the future. There is nothing more important
that the Fed can do.

So, what now?

It should be apparent that housing is not a safe asset, even when we are
not in a bubble. Those who advocate that everyone should be a homeowner are
displaying their ignorance. Homeownership in many markets can be like
putting all your savings in your employer's stock. Ask an autoworker in
Detroit if this is not clear.

Another important takeaway is that older Americans are extremely
ill-prepared for retirement.

The median wealth for
families<http://www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf>between
the ages of 55 to 64 is $179,400. For families between the ages of
45 to 54, it is just $117,900.

This is everything they own -- all their savings, retirement accounts and
the equity they have in their home. The typical retiree in the next two
decades will be almost entirely dependent on his or her Social Security
check. Remarkably, in Washington, all the important people think the most
pressing matter is finding ways to cut Social Security and Medicare.

By detailing the economic slide of the average American, the Fed survey
highlights a problem that is becoming increasing clear: growing inequality
in our country. While most people are hurting badly, the very rich -- whose
wealth and income have grown disproportionately big in recent times -- have
largely recovered from the downturn.
Americans should not tolerate a society where the rules are rigged to
redistribute income upward. Otherwise, expect to become poorer

-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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