Amid Downturn, Net Worth Takes A Beating
ROBERT SIEGEL, host:
The most common indicators of economic well being or distress are the unemployment numbers or perhaps the inflation reports. But here's another measure of how we're doing as a country: net worth. Add up our houses, our cars, our second cars, the money in the bank, the 401Ks, our insurance policies, other assets, then subtract the mortgage balances, the student loans, the credit card debt, other debt - how much are we worth? The Federal Reserve calculates that number every quarter.
And joining us now to talk about it is Roben Farzad of Bloomberg Business Week. Welcome back.
Mr. ROBEN FARZAD (Bloomberg Business Week): Hi, Robert, how are you?
SIEGEL: Fine. How are we? How much are we worth?
Mr. FARZAD: All things considered, as it were, household net worth is down to about $55 trillion.
SIEGEL: We're only worth $55 trillion?
Mr. FARZAD: Well, down from a peak of about $65 trillion at the end of 2007, and that's a rather stunning decline.
SIEGEL: So this means that on average the American household has lost about what percent of its net worth?
Mr. FARZAD: $11 trillion over $64 trillion, it doesn't seem so painful, but on a count of a household by household level, when you see the losses in real estate from the peak, and especially that so many people have lines of credit connected to real estate, there's this very vicious multiplier effect.
SIEGEL: The components that make up the net worth, the big decline would still be real estate?
Mr. FARZAD: Would be real estate, yes. And that's still declining and we're still seeing people pair their mortgage debt, as well they should, after a period of overextending themselves. But it's problematic in that so much of finance, remember the cash out mortgage, using your home as an ATM. That's kind of just an anachronism. That's a vestige of yesteryear. And now there are no other lines of credit available to individuals who kind of got used to a certain standard of living.
Because it's called the wealth effect. You take your accumulated wealth for granted, in addition to your income and, you know, I can go out and buy these kinds of things because I have a $500,000 home behind me.
SIEGEL: The biggest question we would face in the economy is, do I have a job or don't I have a job? But the measure of our net worth would figure prominently, I should think, in questions of do I buy a house, do I buy a car? Can I afford to have another child? Can I retire now? These are questions that the wealth effect would relate to.
Mr. FARZAD: That's right. Most people have this kind of number, this nest egg number more than in the back of their heads. I know what my cash flow needs are every month. I can liquidate this part of my stock portfolio with a certain degree of certainty. And a lot of that has just been disqualified over the past two years.
SIEGEL: Now, in fairness, while we're way down from 2007, we're still better off than we were in 2004.
Mr. FARZAD: Yeah, that's right. But this is a problem in that you run on kind of, are you better off than you were four years ago? That seems to be the metric for everybody. And this credit bust, or whatever we're calling it, is getting pretty long in the tooth already. This has been a three-plus year phenomenon.
And the fact that people are still seeing declines in very important line items of their wealth is very worrisome to the government, which, by the way, is trying to fill the gap by expanding its debt at a huge almost 19, 20 percent clip. Because if you don't, there are going to be these corresponding plunges in demand and, voila, you have depression.
SIEGEL: Well, the Federal Reserve is the agency that tracks this figure. And they put out many pages detailing the wealth of the country. Is there any hopeful little number in here, in the small print that we could find?
Mr. FARZAD: You know, there is a number here. If you look at deposits, corporations and households are stockpiling record amounts of deposits, I think, as a fraction of their net worth after they have levered so much. And so we've seen money in the bank in terms of check deposits, CDs, savings deposits, money market funds really increasing as the other parts of the household balance sheet have kind of deteriorated.
The stock market was up enormously last year to the extent that you didn't liquidate your 401K in a panic at the end of the 2008 or beginning 2009. You were able to feel the oats of a great market last year, but it's still well off of its 2007 high. So, a lot of cash on the sidelines, as we talked about before. And for that cash to be earning so little right now makes, you know, the cash component of household net worth be very coldly comforting. It's not something that gives people a lot of reassurance. It's more out of a panic reflex.
SIEGEL: Okay, thank you, Roben.
Mr. FARZAD: Thank you, Robert.
SIEGEL: Roben Farzad writes for Bloomberg Business Week. He spoke to us from New York.
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