[Marxism] The Recovery Threw the Middle-Class Dream Under a Benz

Louis Proyect lnp3 at panix.com
Wed Sep 12 09:50:25 MDT 2018


NY Times, Sept. 12, 2018
The Recovery Threw the Middle-Class Dream Under a Benz
By Nelson D. Schwartz

Once a year or so, the 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 Ms. 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 that 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 high-net-worth individuals call a 
liquidity event.

Data from the Federal Reserve show that over the last decade and a half, 
the proportion of family income from wages has dropped from nearly 70 
percent to just under 61 percent. It’s 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 that Americans 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 this 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 that it was vast.

Banks were hurt, too, but aside from the collapse of Lehman Brothers, 
the pain proved transitory. Bankers themselves were never punished for 
their sins. In one form or another — the Troubled Asset Relief Program, 
quantitative easing, the Fed’s discount window — the financial sector 
was supported in spectacular fashion.

Like the bankers, shareholders and investors were also bailed out. By 
cutting interest rates to near zero and pumping trillions — yes, you 
read that right — into the economy, the Federal Reserve essentially put 
a trampoline under the stock market. The subsequent bounce produced a 
windfall, but only for a limited group of beneficiaries. Only about half 
of American households have any exposure to the stock market, including 
401(k)’s and retirement plans, and ownership of the shares of individual 
companies is clustered among upper-income families.

For homeowners, there wasn’t much of a rescue package from Washington, 
and eight 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 like 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 between 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 that 
families in the latter two 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 middle-income families was 19 percent 
below 2007 levels, adjusted for inflation. But among blacks, it was down 
40 percent, and Hispanics saw a drop of 46 percent. For many, 
old-fashioned hard work has simply not been a viable path out of this 
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.

“It peeled away the facade and revealed an anger that had been building 
for decades,” said Ms. Swonk, who is chief economist at Grant Thornton 
in Chicago. “The crisis was horrific, but its legacy pushed us over the 
edge in terms of the discontent.”

It also made inequality and the One Percent an urgent topic, and made 
unlikely celebrities of wonky intellectuals such as the economist Thomas 
Piketty. His best seller, “Capital in the Twenty-First Century,” 
published in 2013, was 816 data-laden pages that laid out a grim 
diagnosis. Mr. Piketty argued that the decades after World War II, when 
the divisions between the classes narrowed and opportunities to move up 
the economic ladder expanded — that is, when the middle class as we knew 
it was formed — may actually have been an aberration. Society, Mr. 
Piketty wrote, risks a return to the historical norm of a yawning gap 
between rich and poor.

Whether or not he is right, the concentration of wealth that is a legacy 
of the financial crisis will make itself felt far into the future. 
Younger Americans, in particular, will be marked by the experience of 
2008 much as the Crash of 1929 and the Great Depression haunted the 
generations who lived through it in the last century. Not only were they 
unable to accumulate assets in the lean years of the early recovery, but 
they also missed out on the recent stock market rally that benefited 
their older and richer peers.

A recent study by the Federal Reserve Bank of St. Louis found that while 
all birth cohorts lost wealth during the Great Recession, Americans born 
in the 1980s were at the “greatest risk for becoming a lost generation 
for wealth accumulation.”

For those fortunate enough to still possess wealth after the crisis, the 
future looks very different. With the security provided by assets, 
rather than just income, they and especially their children are on a 
glide path for a gilded financial future.

“Over and over, you see that family wealth is an important determinant 
of opportunity for the next generation, over and above income,” said 
Fabian T. Pfeffer, a sociologist at the University of Michigan. “Wealth 
serves as a private safety net that allows you to behave differently and 
plan differently.”

A wealthy person who loses a job can afford to be more choosy and wait 
for an opportunity suited to his or her skills and experience. The risk 
of going to an expensive college and taking on debt is lower when there 
is parental wealth to fall back on.

Timothy Smeeding, who teaches public affairs and economics at the 
University of Wisconsin, put it more bluntly. “You can see dynasties 
starting to form,” he said.

Ten years have passed since the trauma of 2008, the nerves are still 
raw, and the pain still has a way of flaring up. Every time she goes 
down into the basement and peruses her diary, Diane Swonk feels it anew.

“It is the diary of an economist, as well as a mother and a human 
being,” Ms. Swonk said. It includes her published writings for clients, 
as well as her feelings, thoughts and fears as the crisis unfolded. She 
also recorded her impression of key figures she met during those fateful 
months, including Lawrence H. Summers, a top White House economic 
official at the time, and Ben S. Bernanke, then the chairman of the 
Federal Reserve.

“The financial crisis became a delineator,” she said. “There were those 
who could recoup their losses and those who could not. Some people have 
amnesia, but we are still living with the wounds.”

Nelson D. Schwartz has covered economics since 2012. Previously, he 
wrote about Wall Street and banking, and also served as European 
economic correspondent in Paris. He joined The Times in 2007 as a 
feature writer for the Sunday Business section. @NelsonSchwartz



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