We constantly hear the factoids about “American households” that paint a picture of immense wealth – and therefore a lack of risk for consumer lenders during the next downturn. We hear: “This – the thing that happened in 2008 and 2009 – won’t happen again.”
For example, total net worth (assets minus debt) of US households and non-profit organization (they’re lumped together) rose to an astronomical $92.8 trillion at the end of 2016, according to the Federal Reserve. This is up by nearly 70% in early 2009 when the Fed started its QE and zero-interest-rate programs.
Inflating household wealth was one of the big priorities of the Fed during the Financial Crisis. It would crank up the economy. In an editorial in 2010, Fed Chair Ben Bernanke himself called this the “wealth effect.” So with this colossal wealth of US households, what could go wrong during the next downturn?
Here’s what could go wrong:
About half of Americans do not have enough savings to pay for even a minor emergency expense. The Federal Reserve found that 46% of adults could not cover an emergency expense of $400, such as a broken windshield. They would either have to borrow the money or try to sell the couch or something. So nearly half of the adults in the US live from paycheck to paycheck.
About 15% of American households have either zero or negative net wealth, according to the New York Fed. Negative net worth means they have more debt than assets.
And nearly 47 million Americans, or nearly 15% of the population, live below the poverty line, according to the Census Bureau.
So who benefited from the “wealth effect”? Those who had the most assets. At the very tippy-top: Warren Buffet. At the other end of the spectrum, in 2016, only 52% of households owned stocks directly or indirectly. The phenomenal stock market boom left 48% – usually those below the poverty line, those who cannot cover emergency expenses, those with zero or negative net worth, etc. etc. – in the dust.