Crisis Sets America Back 20 Years

The average U.S. middle-class family lost 40 percent of their net worth during the worst three years of the crisis, according to the Federal Reserve’s report.

The recently published report illustrates why the crisis has caused such despair in the U.S. Europeans often fail to understand or appreciate the scale of this phenomenon because, for example, an unemployment rate of eight percent — which in America would be the cause of great consternation — would be a sign of prosperity, not stagnation, in many E.U. countries.

The report reveals that, during the worst three years of the crisis, the average middle-class U.S. family lost 40 percent of their net worth, with the value of their assets falling from $126,000 in 2007 to a mere $77,000 in 2010. This means that we are back where we were in 1992 (adjusting for inflation) — in other words, the last twenty years could quite simply be written off in financial terms. Of course, the main culprit was the real estate market crash, which caused the value of most U.S. homes, which were bought on credit, to plummet.

In addition to plummeting house prices, pensions also fell, albeit not quite so rapidly. The average American’s annual earnings fell by just under eight percent from 2007 to 2010 (from $49,600 to $45,800).

Published every three years, the Federal Reserve’s report on consumer finances defines the “average” family as one exactly half-way up the social ladder — richer than the poorest half of Americans but poorer than the richest half of Americans.

In the U.S., the middle class has been the main victim of the crisis. This is because the poorest Americans had no real estate to lose and the wealthiest Americans’ assets encompassed not just houses but also other investments, such as stocks and various funds. The securities market rebounded strongly following the initial crash, largely compensating for what the millionaires had lost in their property (which was actually not a great deal, because it was mainly cheap houses that lost value).

The impoverishment of the middle class is the main reason for the dramatic increase in social inequality over the past few years, which is now at the same level as it was prior to the Great Depression in the 1930s. The 400 richest Americans have accrued more wealth than half of all U.S. citizens put together — over 150 million people. This is why Warren Buffett, the second-richest person in America, has publicly expressed his surprise on several occasions that his secretary pays taxes at a higher rate than he does. He supports President Obama’s plan — which has been repeatedly blocked by Republicans — to increase the taxes paid by millionaires.

Within the middle class, which has suffered across the board, the hardest hit have been the middle-aged (35-44 year-olds), who typically took out mortgages to buy houses at inflated prices just before the crisis erupted. The Federal Reserve has calculated that the value of their assets fell by as much as 54 percent. In the western and southern regions of the U.S., where the prices fell the most, the average citizen lost even more.

People dropping out of the middle class have been swelling the ranks of the poor. There are already 46 million Americans receiving free food aid, compared with less than 30 million in 2007. This is why the Republicans often maliciously refer to Barack Obama as the “food stamp president.”

Only 52 percent of Americans were in a position to save anything in 2010 (whereas ten years earlier, for instance, over 60 percent were able to set some savings aside). At the same time, the reasons for saving reflect the gloomy mood — whereas people used to save up for a good school for their children or for their retirement, these days, people are increasingly setting money aside to cope with disasters.

The publication of the Federal Reserve’s report coincided with a gaffe by President Obama, who claimed last Friday that “the private sector is doing fine,” a comment he then sought to explain a few hours later. But it was too late — this one sentence, uttered in haste and taken out of context, is proving difficult to brush under the carpet and will most likely come back to haunt Obama in the run-up to November’s election. Some bloggers and radio presenters are poking fun at the president, saying that he gets most of his information on America from parties with the stars of Hollywood and the pop musicians who are helping him to raise money for his election campaign.

Republican candidate Mitt Romney, who is also perceived as having little grasp on reality, due to his $250 million in assets, has waded into the fray. On Tuesday, Romney declared, “Look, people are having hard times in this country and the president needs to go out and talk to people, not just do fundraisers, go out and talk to people in the country and find out what’s happening.”