Dean Baker
CNN, June 13, 2012

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The Federal Reserve Board’s newly released triennial Survey of Consumer Finance (SCF) confirmed what most of us already knew: The middle class has taken a really big hit. It showed that between the 2007 survey and the 2010 survey, the typical family had lost 38.8 percent of their wealth. In fact, the wealth of the typical family was down 27.1 percent from where it had been a decade ago in 2001. This is in spite of the fact that the economy was more than 15 percent larger than in 2010 than it had been 2001.

It wasn’t just wealth that had dropped; the survey showed that income had fallen as well. Median family income in 2010 was down by 7.7 percent from its 2007 level and 6.3 percent from its level a decade ago.

There is not much surprising about these numbers. The SCF is picking up the impact of the collapse of the housing bubble. For the vast majority of middle-class families, their home is by far their largest financial asset. For decades they were encouraged to believe that it was a safest way to save for the retirement or other purposes. 

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

Unfortunately, tens of millions of Americans listened to experts like then Federal Reserve Board Chairman Alan Greenspan, who assured the country that there was no housing bubble. According to press accounts, Mr. Greenspan has a very nice pension and a job that pays more than $1 million a year.

It is difficult to read through the survey results and not get angry at the wreckage from a completely preventable disaster. If the Fed had acted responsibly and taken steps to rein in the housing bubble before it had grown to such dangerous levels, as some of us urged at the time, we need not have been in the situation.

Alan Greenspan could have used his enormous stature to warn of the dangers to homeowners of buying over-valued houses. He could have warned lenders of the risks of issuing mortgages on over-valued property. And he could have used the massive research capacities of the Fed to document without question the fact 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.

It seems almost inconceivable that if the Greenspan Fed had used these bullets to shoot at the bubble that it would have continued to grow. But if all else failed he could have raised interest rates. To make his interest rate hikes even 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.

There are other lessons here. 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 take away from this survey is that older workers are extremely ill-prepared for retirement. The median wealth for families between the ages of 55-64 is $179,400. For families between the ages of 45-54 it is just $117,900.  

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

Finally, this new Fed report should further focus attention on inequality. Most people in the country are hurting badly, but the very rich have largely recovered from the downturn. The public should not tolerate an economy where the rules are rigged to redistribute income upward. We need an economy that is designed to benefit everyone, not just the wealthy elite.