Skip to main content

Why middle class has taken a big hit

By Dean Baker, Special to CNN
updated 11:25 AM EDT, Wed June 13, 2012
The average American family's net worth dropped almost 40% between 2007 and 2010.
The average American family's net worth dropped almost 40% between 2007 and 2010.
STORY HIGHLIGHTS
  • Federal Reserve released survey showing average family losing 38.8% of net worth
  • Dean Baker: Few surprised that the average American is poorer than before
  • He says Alan Greenspan could have tried to contain the housing bubble
  • Baker: Americans should not tolerate a society in which wealth inequality widens

Editor's note: Dean Baker, an economist, is co-director of the Center for Economic and Policy Research, a progressive economic policy organization. He is author of "The End of Loser Liberalism: Making Markets Progressive."

(CNN) -- The Federal Reserve's newly released Survey of Consumer Finances confirmed what most of us already knew: The middle class has taken a really big hit.

Between 2007 to 2010, the typical family had lost nearly 40% of their wealth. And, despite that our economy was 15% larger in 2010 than in 2001, the typical family's wealth decreased by 27.1% since 2001. On top of that, income had fallen. Median family income in 2010 was down by 7.7% from its 2007 level and 6.3% from its level a decade ago.

The picture looks dismal, doesn't it? But none of these numbers are surprising really. Is the average American poorer than before? Yes.

Dean Baker
Dean Baker

The Fed's survey is picking up on the huge effect of the collapse of the housing bubble. For many middle class families, their home is by far their largest financial asset. For decades, people were encouraged to believe that it was the safest way to save for retirement or other purposes.

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

Middle-class talk back: Moira Bindner
Say goodbye to the middle class?

Unfortunately, tens of millions of Americans listened to experts such as former Federal Reserve Chairman Alan Greenspan, who assured the country that there was no housing bubble. According to reports, Greenspan has a very nice pension and a job that pays more than $1 million a year. He certainly doesn't have to worry like the typical American family.

It is difficult to read through the Fed survey and not get angry at the wreckage from a completely preventable disaster.

American families: How are you coping?

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

If Greenspan had acted responsibly and taken some of these steps, as some of us have urged at the time, the housing bubble could have been contained before it was too late. But if all else failed, he could have raised interest rates. To make interest rate hikes 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.

So, what now?

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 takeaway is that older Americans are extremely ill-prepared for retirement.

The median wealth for families between the ages of 55 to 64 is $179,400. For families between the ages of 45 to 54, it is just $117,900.

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

By detailing the economic slide of the average American, the Fed survey highlights a problem that is becoming increasing clear: growing inequality in our country. While most people are hurting badly, the very rich -- whose wealth and income have grown disproportionately big in recent times -- have largely recovered from the downturn.

Americans should not tolerate a society where the rules are rigged to redistribute income upward. Otherwise, expect to become poorer.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Dean Baker.

ADVERTISEMENT
Part of complete coverage on
updated 8:35 AM EDT, Mon July 21, 2014
Frida Ghitis: Anger over MH17 is growing against pro-Russia separatists. It's time for the Dutch government to lead, she writes
updated 8:27 AM EDT, Mon July 21, 2014
Julian Zelizer says President Obama called inequality the "defining challenge" of our time but hasn't followed through.
updated 7:57 AM EDT, Mon July 21, 2014
Gene Seymour says the 'Rockford Files' actor worked the persona of the principled coward, charming audiences on big and small screen for generations
updated 10:17 AM EDT, Mon July 21, 2014
Daniel Treisman says that when the Russian leader tied his fate to the Ukraine separatists, he set the stage for his current risky predicament
updated 12:42 PM EDT, Fri July 18, 2014
Andrew Kuchins says urgent diplomacy -- not sanctions -- is needed to de-escalate the conflict in Ukraine that helped lead to the downing of an airliner there.
updated 9:50 PM EDT, Fri July 18, 2014
Jim Hall and Peter Goelz say there should be an immediate and thorough investigation into what happened to MH17.
updated 11:07 AM EDT, Fri July 18, 2014
Pilot Bill Palmer says main defense commercial jets have against missiles is to avoid flying over conflict areas.
updated 1:55 PM EDT, Sun July 20, 2014
Valerie Jarrett says that working women should not be discriminated against because they are pregnant.
updated 3:53 PM EDT, Mon July 21, 2014
David Wheeler says the next time you get a difficult customer representative, think about recording the call.
updated 3:33 PM EDT, Fri July 18, 2014
Newt Gingrich says the more dangerous the world becomes the more Obama hides in a fantasy world.
updated 6:11 AM EDT, Fri July 18, 2014
Michael Desch: It's hard to see why anyone, including Russia and its local allies, would have intentionally targeted the Malaysian Airlines flight
updated 3:14 PM EDT, Thu July 17, 2014
LZ Granderson says we must remember our visceral horror at the news of children killed in an airstrike on a Gaza beach next time our politicians talk of war
updated 8:06 AM EDT, Thu July 17, 2014
Sally Kohn says now the House GOP wants to sue Obama for not implementing a law fast enough, a law they voted down 50 times, all reason has left the room.
updated 8:14 AM EDT, Thu July 17, 2014
A street sign for Wall Street
Sens. Elizabeth Warren, John McCain and others want to scale back the "too big to fail" banks that put us at risk of another financial collapse.
updated 4:16 PM EDT, Thu July 17, 2014
Newt Gingrich writes an open letter to Robert McDonald, the nominee to head the Veterans Administration.
updated 12:01 PM EDT, Fri July 18, 2014
Paul Begala says Dick Cheney has caused an inordinate amount of damage yet continues in a relentless effort to revise the history of his failures.
updated 10:04 AM EDT, Fri July 18, 2014
Kids who takes cell phones to bed are not sleeping, says Mel Robbins. Make them park their phones with the parents at night.
updated 1:29 PM EDT, Thu July 17, 2014
Buzz Aldrin looked at planet Earth as he stood on talcum-like lunar dust 45 years ago. He thinks the next frontier should be Mars.
updated 2:04 PM EDT, Wed July 16, 2014
Mark Zeller never thought my Afghan translator would save his life by killing two Taliban fighters who were about to kill him. The Taliban retaliated by placing him on the top of its kill list.
updated 11:18 AM EDT, Thu July 17, 2014
Jeff Yang says an all-white cast of Asian characters in cartoonish costumes is racially offensive.
updated 9:24 PM EDT, Wed July 16, 2014
Gary Ginsberg says the late John F. Kennedy Jr.'s reaction to an event in 1995 summed up his character
updated 12:41 PM EDT, Wed July 16, 2014
Meg Urry says most falling space debris lands on the planet harmlessly and with no witnesses.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT