Economic recovery threw middle-class dream under bus
Once a year or so, economist Diane Swonk ventures into the basement of her 1891 Victorian house outside Chicago and opens a plastic box containing the items that mean the most to her: awards, wedding pictures, the clothes she was wearing at the World Trade Center on the day it was attacked. But what she seeks out again and again is a bound diary of the events of the financial crisis and their aftermath.
“It’s useful to go back and see what a chaotic time it was and how terrifying it was,” she said. “That time is seared in my mind. I looked at it again recently, and all the pain came flooding back.”
A decade later, things are eerily calm. The economy, by nearly any official measure, is robust. Wall Street is flirting with new highs. And the housing market, the epicenter of the crash, has recovered in many places. But like the diary stored in Swonk’s basement, the scars of the financial crisis and the ensuing Great Recession are still with us, just below the surface.
The most profound of these is the uneven nature of the recovery compounded a long-term imbalance in the accumulation of wealth. As a consequence, what it means to be secure has changed. Wealth, real wealth, now comes from investment portfolios, not salaries. Fortunes are made through an initial public offering, a grant of stock options, a buyout or another form of what highnet-worth individuals call a liquidity event.
Data from the Federal Reserve show that over the past decade and a half, the proportion of family income from wages has dropped from nearly 70 percent to just less than 61 percent. It is an extraordinary shift, driven largely by the investment profits of the very wealthy. In short, the people who possess tradable assets, especially stocks, have enjoyed a recovery tAmericans dependent on savings or income from their weekly paycheck have yet to see. Ten years after the financial crisis, getting ahead by going to work every day seems quaint, akin to using the phone book to find a number or renting a video at Blockbuster.
The financial crisis didn’t just kill the dream of getting rich from your day job. It also put an end to a fundamental belief of the middle class: that owning a home was always a good idea because prices moved in only one direction — up. The bubble, while it lasted, gave millions in the middle class a sense of validation of their financial acumen, and made them feel as if they had done the Right Thing.
In theory, if you lost your job, or suffered some other kind of financial setback, you could always sell into a real estate market that was forever rising. Ever-higher home prices became a steam valve, and the “greater fool” theory substituted for any conventional measure of value.
The kindling for the fire that consumed Wall Street and nearly the entire economy was mortgages that should never have been taken out in the first place. Homeowners figured the more house the better, whether or not their income could support the monthly payment, while greedy banks and middlemen were all too happy to encourage them.
When the bubble burst, the bedrock investment for many families was wiped out by a combination of falling home values and too much debt. A decade after that debacle, the typical middle-class family’s net worth is still more than $40,000 below where it was in 2007, according to the Federal Reserve. The damage done to the middle-class psyche is impossible to price, of course, but no one doubts it was vast.
For homeowners, there wasn’t much of a rescue package from Washington, and 8 million succumbed to foreclosure. Sometimes, eviction came in the form of marshals with court orders; in other cases, families quietly handed over the keys to the bank and just walked away. Although home prices in hot markets have fully recovered, many homeowners are still underwater in the worst-hit states such as Florida, Arizona and Nevada. Meanwhile, more Americans are renting and have little prospect of ever owning a home.
Worsening the picture, the post-crisis era has been marked by an increased disparity in wealth among white, Hispanic and African-American members of the middle class. That’s according to an analysis of Fed data by the Pew Research Center, which found families in the Hispanic and African-American groups were more dependent on housing as their principal form of investment. Not only were both minority groups harder hit by foreclosures, but Hispanics were also twice as likely as other Americans to be living in Sun Belt states where the housing crash was most severe.
In 2016, net worth among white middleincome families was 19 percent below 2007 levels, adjusted for inflation. But among blacks, it was down 40 percent, and Hispanics experienced a drop of 46 percent. For many, old-fashioned hard work has simply not been a viable path out of that hole. After unemployment peaked in the fall of 2009, it took years for joblessness to return to pre-recession levels. Slack in the labor market left the employed and unemployed alike with little leverage to demand raises, even as corporate profits surged.
Maybe it was inevitable that when half the population watches its wages stagnate while the other half gets rich in the market, the result is President Donald Trump and Brexit, Britain’s planned exit from the European Union.