America’s Fleeting Housing Bubble “Wealth”

I have to agree with this assessment by Martin Luz at the Huffington Post in which the recent gnashing of teeth over a Federal Reserve Wealth Survey(.pdf) really is much ado about nothing, the more important issue being declining real wages in recent decades rather than another asset bubble that has inflated and popped.

Bloggers and reporters need to stop with the gnashing of teeth over a Fed report that claims Americans lost 40% of their wealth in the Great Recession, mainly due to a decline in housing prices. The reality is: you can’t lose 40% of something you don’t have.

What Americans really lost was 40% of our national credit line. It wasn’t real “wealth.” It was merely an expansion of housing-related credit that made us feel wealthy.

The key thing to take away from this chart is that all the “wealth” the Fed is claiming we lost was never really there. Money flooded the housing market, beginning in around 2000, and pushed prices up. It wasn’t real. It was a bubble! In other words: imaginary, non-existent, illusory, fake, phony, phantasmagorical.

Of course, along with this “imaginary” wealth came jobs and, then, job losses, that were all too real. This was the unfortunate side effect of what Luz characterizes as a deliberate attempt by former Fed Chief Alan Greenspan to inflate home prices and create a “wealth effect” in order to offset the effects of the bursting internet stock bubble and sluggish wage growth - in essence, propping up the vital consumer spending component of the U.S. economy by means other than income in order to sustain growth.

It worked for a little while…

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3 Responses to America’s Fleeting Housing Bubble “Wealth”

  1. Steven White June 22, 2012 at 8:08 AM #

    I agree strongly with Luz’s article and this post. The spate of stories about this issue seem mostly to be politically motivated (anti-Obama) or just simple journalistic sensationalism.

    The ridiculous values attributed to real estate assets during the bubble were what we used to call ‘paper profits’ because they only existed on paper unless you were willing and able to sell the asset and pocket the cash.

    As with any investing, timing is everything.

    Unlike precious metals, stocks, bonds and other investments, selling the family home for a profit before the crash and renting until prices came back down was not a viable or attractive option, even if you were able to correctly predict and time the moves. (Try convincing your wife and kids to arbitrage your home for a “quick” buck and see how it goes over. God help you if you’re wrong!)

    Further, many of the people who ‘bought’ homes during the bubble borrowed nearly 100% (or more) of the purchase price and had no real skin in the game; they were just glorified renters who were speculating with OPM. In many cases, first and last months’ rent plus security deposits were more than the cash needed to ‘buy’ a home during the boom. Why not “buy” a home and get an automatic home “equity” line of credit to boot? Nothing ventured, nothing lost. They’re back to being renters after squatting with no payments for as long as possible. They haven’t lost wealth, they’re actually ahead!

    Greenspan was the key culprit in this scam and that’s why I started reading the original blog, “The Mess That Greenspan Made” years ago. Bernanke is arguably worse since the facts are now so clear that anyone can see what’s wrong and yet he continues to vigorously pursue AG’s road to the ruination of our country.

    All the effort to re-inflate that bubble and encourage credit is horribly misplaced. The moral hazard alone of teaching our citizens that debt is good and thrift and savings are to be avoided is staggeringly stupid. The malinvestment is sickening.

    In a sane world, Greenspan, Bernanke and virtually all the so-called “leaders” would be pilloried, at least. To the contrary, they continue to garner awards and medals, be re-elected and re-appointed and live the life of royalty in jets and limos as the citizenry keeps its collective head in the sand (or, if you prefer, up its ass) praying for a miracle that can’t happen.

    Now, we have yet another chance to elect a President and look at the choice we’ve given ourselves: Obamney. Neither of these vapid, narcissistic losers gets it and we will continue to decline under either one’s “leadership.” Obama re-appointed Bernanke. Do you really think Romney will change anything significant?

    The only candidate who correctly predicted this mess was Ron Paul and he was laughed off the stage (again).

    We get the government we deserve. The sad injustice is that some of us get it but we’re going down with the ship anyway. Certainly, future generations will suffer despite being blameless. But, that kind of thinking is foreign to the masses and will never win the day.

    • Tim June 22, 2012 at 8:46 AM #

      Obamney - I hadn’t heard that one yet, but it’s appropriate. I think we’ll need more than elections in this country to effect substantive change, unfortunately.

      • Steven White June 22, 2012 at 11:52 AM #

        Agreed. Elections don’t seem to be working. We just keep getting Tweedledee and then Tweedledum over and over again.

        I’ve been desperate for real change since Perot ran in 1992 and did pretty well. I keep wondering how long the masses can be pacified by TPTB.

        I wonder if enough people will wake up to the erosion of our founding ideas, liberties, purchasing power, opportunities, morals, standard of living, etc. or if the process is just too much like “boiling a frog” and most people have just gotten too comfortable.

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