Monthly Archives: March 2014

The Federal Reserve and Wealth Inequality

March 9, 2014
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The Federal Reserve and Wealth Inequality

The Federal Reserve has a well-defined dual-mandate: stabilize prices and maximize employment. However, in trying to achieve these objectives, the Fed can inadvertently favor some segments of the population more than others. This was indeed the case from the perspective of households’ net worth position during the Great Recession.

We have already highlighted the highly unequal distribution of financial wealth in the United States in a previous post. One way to think about wealth inequality is that there are two kinds of homeowners. Those at the very top end of the wealth distribution who own most of the stocks and bonds in the economy – let’s call them creditors. And for the rest the single biggest asset is their home – let’s call them debtors. The debtors do not own much wealth outside of their homes, and in fact need to take out a mortgage from the creditors to purchase the house. Of course, the financial system intermediates this process, but ultimately creditors are lending to debtors.

When the economy slows down and there is a sharp decline in house prices, it is debtors who initially suffer. It is the debtors’ net worth that is most heavily impacted, . . .

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The Great Housing Hangover

March 8, 2014
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The Great Housing Hangover

Just how bad was the housing binge from 2002 to 2006? Here is retail spending on furniture, appliances, and home improvement from 2006 to 2013. The lines are indexed to 2006, so for every year, if you take the point for that year and subtract 100 you get the percentage change from 2006 to that year.

It is stunning. Nominal retail spending on furniture, appliances, and home improvement remains below its 2006 level in 2013, 7 full years later. Remember that this is nominal spending, so if you adjust for inflation the gap is even larger!

A natural question is whether 2006 represents a useful benchmark. Perhaps spending on housing-related goods in 2006 was artificially inflated by the housing boom, and is therefore not a useful reference point? Or alternatively, perhaps 2006 spending was what we would expect from a normally functioning economy?

The truth is in between. Spending on housing-related goods was no doubt fueled by the unsustainable housing boom. But the correction is likely also too extreme — different policy actions during the Great Recession likely could have helped soften the blow.

What policies? You will have to wait until our book comes out in . . .

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Wealth Inequality and Stock Market Gains

March 7, 2014
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Wealth Inequality and Stock Market Gains

For the past couple of years, the quarterly release of the Federal Reserve Flow of Funds data has been cheered because it has shown a sharp rise in household wealth, particularly of financial assets. We agree this is good news, but the aggregate headline numbers are incomplete.

It is crucial to think carefully about the distribution of these wealth gains. We have already shared some thoughts on the distribution of housing wealth gains — see our last post. But we also wanted to address the rise in financial asset values such as the stock market.

An indisputable fact is that the distribution of financial assets is heavily skewed to the rich. In fact, the top 20% of the wealth distribution owns over 80% of the financial assets in the economy! So when the aggregate Flow of Funds data show a rise in financial asset values, it is important to remember that the rise primarily benefits the rich. Here is the fraction of total financial assets held by the top, middle, and bottom quartile of the U.S. population in 2010.

Why might this matter? Our own research shows that the spending of poorer households is more . . .

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Is Rising Housing Wealth Great News for Spending?

March 7, 2014
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Is Rising Housing Wealth Great News for Spending?

The Federal Reserve reported yesterday a continued rise in home values, offering a boost to household wealth. From 2006 to 2011, housing wealth fell from $23 trillion to $16 trillion, a loss that devastated the U.S. economy. Our research estimates that almost half of the decline in spending during the Great Recession can be attributed to the decline in house prices.

So the rise in housing wealth–reported to be back up to $19.4 trillion–must be great news for household spending, right? Well, unfortunately, the story is a bit more complicated. The rise in housing values over the past two years has been unconventional, driven by a strong price rebound in foreclosed properties and increasing participation by investors. This is not your 2002 to 2006 housing boom–it is fundamentally different, and therefore unlikely to fuel household spending to a significant degree.

The macroeconomic data may hide this fact, but a look at the microeconomic data makes it more transparent. Below, we provide charts based on city-level data, where we look at the relation between house price growth, the share of purchases by investors, and foreclosures. City-level data help us see why house prices are rising. For example, house prices in Phoenix, . . .

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