Bankruptcy

Gone in 1.8 Seconds

By Christian E. Weller

A trillion here, a trillion there and all of a sudden you are talking real money. We are getting used to the ?T? word. Over the past year and half ? from the middle of 2007 through the end of 2008, when the crisis unfolded ? the crisis in the housing market and in the stock market has cost American families a total of $15 trillion in 2008 dollars.

It makes sense, though, to put the loss of personal wealth in perspective. In these 18 months, approximately 27 million times the average family?s wealth -- $566,000 in 2008 dollars. Put differently, equivalent of the average family?s net worth disappeared every 1.8 seconds in those 18 months.

In fact, this was the sharpest relative wealth decline in more than fifty years. Over the 18 months since the crisis began, inflation-adjusted personal wealth has fallen by 22.8%. This was the fastest such decline since the Federal Reserve started to collect the information in 1952. The quickest 18-month wealth decline before this crisis was 12.0% for the period from March 1973 to September 1974. We are shattering speed records that nobody ever wanted to break.

Didn?t families build up enough of a buffer because of the bull market in the housing and the stock markets? Apparently not. Family wealth is a buffer for emergencies, insurance for when sources of income like wages disappear, e.g. because of retirement, and a tool to invest in one?s own future through education or starting a business. Hence, it is important to compare current wealth to current income. In the fourth quarter of 2008, the ratio of wealth to after-tax income stood at 483.3%, its lowest level since March 1995. It?s as if the stock market boom of the 1990s and the housing boom of the 2000s never happened.

At the end of the day, though, these declines matter because they leave families in a very precarious situation. Over the years, we have asked families to shoulder an ever greater economic burden. Health insurance coverage and the quality of health insurance have dropped, ?do-it-yourself? savings plans have taken the place of traditional pensions, changes to financial aid and rapidly rising tuition costs have meant more and larger student loans, Social Security benefits have already been trimmed, and a whole host of social programs have been cut. Personal wealth today takes on a completely different meaning than it did for previous generations. The money that a family sets aside has to go a lot further than it used to. That?s why the trillions in lost wealth are especially scary.

Full post as published by Credit Slips on March 15, 2009 (boomark / email).