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As others have noted, it was wealth Americans never really possessed. The data point that I'd find most interesting is how much debt was accumulated on the back

As others have noted, it was wealth Americans never really possessed. The data point that I'd find most interesting is how much debt was accumulated on the back of that phony wealth. That is, how much more debt were Americans able to accrue specifically because of the bubble (than they otherwise would have been able to). Losing bubble wealth is bad enough (the psychological impact alone), losing it when you've stacked debt against it is a very real problem. The fake wealth was used to create very real debt. Suddenly you've got 1/3 of all home owners under water on their mortgages.

geogra4 14y ago
>As others have noted, it was wealth Americans never really possessed This is one thing that definitely rings true to me. I grew up in a wealthy community that abutted many, many poorer ones. I would often ride my bike through all of these places, especially the most impoverished ones and lament to myself "So this is the richest country in the world?" Later, after I graduated college and started looking for places to live it was amazing to me how much wealth was caught up in places I don't think I'd ever want to live. Nearly identical tract housing for 10s of miles in all directions. Nothing walkable at all, even sidewalks were just an afterthought. "So, is this is what wealth looks like?" I thought to myself. Obviously it wasn't wealth. That money never existed, but the debt people signed contracts for is real.
- guelo 14y ago
  > rings true to me The problem with complex macroeconomics and popular politics summarized in one phrase.
  - jlgreco 14y ago
    I wonder if we are best served by a democracy when, with perhaps the most important political issue there is, common sense and anecdotes provide little value and a higher education in a particular field is required to make an informed decision.
    - guelo 14y ago
      Well, that was the reason for the creation of the Fed in the first place, the idea that you could have technocrats setting macroeconomics policy without political influence. But then Allan Greenspan happened, an ideologue disciple of Ayn Rand. When the federal budget was running a surplus in 2000 he told congress that budget surpluses were dangerous, then he pushed for Bush's tax cuts and then he helped inflate real estate and ignored everybody that was saying it was an out of control bubble. So no, unelected elites aren't going to save us either.
      - rubashov 14y ago
        The Fed was founded because in fly-over country the financial system was rickety. Off the coasts, banks were regularly going bust and taking people's savings with them. This almost always happened during harvest season when demand for currency was high. In the urban centers the banking system was working fine. The problem to solve was a ridiculously inefficient and inept banking sector in large swathes of the country. As soon as the idea of some sort of federal level reform got going the House Of Morgan and friends seized control and the Fed became a tool of the major banks, which were already working fine, to increase their profits and control. Almost from the start it was the case the Federal Reserve Bank of New York really ran the system, which was entirely not the original idea. The idea of the Fed originated from a temporary problem unique to a particular period of American history, but was immediately usurped by clever power and money hungry people.
    - aggronn 14y ago
      That was, in an antiquated sense, the premise behind the US being born a republic. Not macroeconomics in particular, but insofar as it is a compromise between technocracy and majority rule and self determination. Philosophers and political theorist have been struggling with this since before Plato's Republic. Its a very very real question, though the consensus that democracy is the best thing we've got has been building for centuries.
    - rubashov 14y ago
      For calling the last three recessions surveys did better than economists' forecasts. You see similar results for forecasting and reporting current price inflation. I don't really buy that the common American man is an idiot. "Elites" have pushed most idiotic economic and foreign policy initiatives against the popular will. Americans have generally had to be tricked by lies and expensive PR campaigns into supporting wars, for example. Their initial judgments were sound.
- cynicalkane 14y ago
  This is an interesting topic but I'm not sure it has much to do with the fluctuations of nominal wealth. The trouble isn't people realizing that they're less wealthy in a philosophical sense, it's that they're realizing they're less wealthy in the ordinary dollar sense.
- krschultz 14y ago
  My mom used to push my dad to buy a 2nd house in Florida. They wanted to retire there and the prices were rising so fast she believed they never would be able to afford it if they didn't get one in 2005 or 2006. (They are retiring in the next 2013-2014 range). My dad always refused. He ran a medium sized manufacturing business (about 100 employees) and is certainly in the top 5%, but not the 1% of people in the country in terms of income. His rational at the time for not buying the house was very simple: "There aren't that many people in this country that can afford a house this expensive. It just doesn't add up to me. I know that most people don't make what I make, and if it's a struggle for me to do it rationally, something is wrong here". They didn't buy the house, but we all thought he was being too pride bound at the time. Now they're looking at what used to be 1.5 million dollar places that are going for $550-$600k. Meanwhile our house in New Jersey dropped in price roughly $100k because the bubble economics didn't take hold here as much. The bubble was absolutely crazy. At the end of the day there were a lot of people buying houses that they could only afford assuming the value of the house increased signifcantly before they sold them. Essentially they could only pay the carrying costs - and that was before the jobs market tanked.
- eli_gottlieb 14y ago
  The two factors aren't actually linked. My father got his original training as a city planner before going into IT, and NIMBY, combined with the desire for high property values, is the single most powerful political force in America. We simply don't have urban planning as it is practiced in most other countries, nor the land-value tax used in many places to drive urbanization. Though you may be interested in reading the essay, "The Problem of Scarcity".
cynicalkane 14y ago
When you hear economists advocate monetary stimulus, this is part of the reason why. Being over your head in interest not only sucks, it has real consequences for economic supply and demand. This is true both for consumers and "job creators".
anonymoushn 14y ago
This isn't so bad for the underwater homeowner. He or she can strategically default and the bank will likely choose not to foreclose so that it can continue to claim that the mortgage is worth its full value.
- adventureful 14y ago
  There are certainly very strategic ways to deal with it, but you're going to take a large hit on credit with any default. That can be a very expensive price to pay over time.
- SwellJoe 14y ago
  That isn't how it's working out for thousands (maybe millions) of homeowners who've defaulted, either strategically or because they lost their job and simply can't afford to keep paying for a mortgage on a house worth tens or hundreds of thousands less than they paid for it. Banks are foreclosing at an unprecedented rate, and even sometimes doing so on homes of people who haven't actually missed a payment. My parents neighborhood is now about 20% uninhabited, because of bank foreclosures. My parents are $70k+ in the hole on their house, purchased during the peak of the boom, and it would never cross their minds to default on a debt. $70k is a pretty devastating economic hit to a middle class couple, now living on savings and Social Security. It's easy for folks not impacted by the economic meltdown (like those of us in the tech industry) to make light of the very real pain a lot of lower income and middle class home owners are going through right now. But, the reality is that people are being screwed left and right by the very banks that caused the crisis.
  - samstave 14y ago
    We need a google map which people can submit addresses to that have been foreclosed on. This will show the foreclosure rate in a way I would trust more than what the banks may be reporting.
    - SwellJoe 14y ago
      Not specifically what you're wishing for, but interesting data porn, nonetheless: http://www.npr.org/templates/story/story.php?storyId=111494514 http://www.npr.org/templates/story/story.php?storyId=1114945...
pessimizer 14y ago
When people think they have more money, they spend more money. https://en.wikipedia.org/wiki/Wealth_effect https://en.wikipedia.org/wiki/Wealth_effect
brudgers 14y ago
"As others have noted, it was wealth Americans never really possessed." If a person sold a house bought pre-bubble during the bubble, the wealth was very muched possessed. If a person invested money in real estate during the bubble, they very much lost wealth. Likewise, if their 401k took a hit when the stock market dove, or they cashed out their retirement savings when they lost their job, the wealth lost wasn't on paper, but very much real. Yes, some people's gains and losses were on paper, but for others, the losses were jobs, homes, and savings.
- adventureful 14y ago
  Real wealth can be realized through a sale of the asset (or in the case of cash, judged based on the real goods it can buy). If something can never actually be sold for whatever the supposed price is, then the value isn't real. The vast majority of the bubble premium could have never been realized under any scenario, and thus was not real (there wasn't even a fraction enough cash, bonds, equities, etc. to put toward realizing the real estate bubble's premium, the market could have never become actual through real sales). Only a fraction of US homes were sold during the bubble era. You can technically bid a stock to trillions in dollar worth (say Cisco goes to $25 trillion during the dotcom bubble), but you'll never be able to actually realize even a fraction of that value. And if you can't mathematically ever realize that value through a sale, then it is not actual.
  - JumpCrisscross 14y ago
    You're talking about something between fire sale price and liquidation value; this far under-states value from an economic perspective. It is the equivalent of saying AAPL isn't worth $571 because if literally every holder of Apple stock decided to sell today they wouldn't get that price. It remains plausible that an astute family selling their house in 2006 or 2007 would have captured most if not all of the premium in their home's value to today's prices.
- lifeisstillgood 14y ago
  As every banker knows, debt is an asset. The bubble said everyones houses were worth 20 gazillion dollars. One person is persuaded to sell thier house for 10 million dollars, another borrows 10 m to buy it. The seller is very happy, The borrower is obligied to repay and the bank borrowed 8 m in someone elses cash and invented theremaining 2. Is there an economist who could tell me what that 2 m that gets created by bank lending actually does to inflation ?

geogra4 14y ago

>As others have noted, it was wealth Americans never really possessed This is one thing that definitely rings true to me. I grew up in a wealthy community that abutted many, many poorer ones. I would often ride my bike through all of these places, especially the most impoverished ones and lament to myself "So this is the richest country in the world?" Later, after I graduated college and started looking for places to live it was amazing to me how much wealth was caught up in places I don't think I'd ever want to live. Nearly identical tract housing for 10s of miles in all directions. Nothing walkable at all, even sidewalks were just an afterthought. "So, is this is what wealth looks like?" I thought to myself. Obviously it wasn't wealth. That money never existed, but the debt people signed contracts for is real.

guelo 14y ago
> rings true to me The problem with complex macroeconomics and popular politics summarized in one phrase.
- jlgreco 14y ago
  I wonder if we are best served by a democracy when, with perhaps the most important political issue there is, common sense and anecdotes provide little value and a higher education in a particular field is required to make an informed decision.
  - guelo 14y ago
    Well, that was the reason for the creation of the Fed in the first place, the idea that you could have technocrats setting macroeconomics policy without political influence. But then Allan Greenspan happened, an ideologue disciple of Ayn Rand. When the federal budget was running a surplus in 2000 he told congress that budget surpluses were dangerous, then he pushed for Bush's tax cuts and then he helped inflate real estate and ignored everybody that was saying it was an out of control bubble. So no, unelected elites aren't going to save us either.
    - rubashov 14y ago
      The Fed was founded because in fly-over country the financial system was rickety. Off the coasts, banks were regularly going bust and taking people's savings with them. This almost always happened during harvest season when demand for currency was high. In the urban centers the banking system was working fine. The problem to solve was a ridiculously inefficient and inept banking sector in large swathes of the country. As soon as the idea of some sort of federal level reform got going the House Of Morgan and friends seized control and the Fed became a tool of the major banks, which were already working fine, to increase their profits and control. Almost from the start it was the case the Federal Reserve Bank of New York really ran the system, which was entirely not the original idea. The idea of the Fed originated from a temporary problem unique to a particular period of American history, but was immediately usurped by clever power and money hungry people.
  - aggronn 14y ago
    That was, in an antiquated sense, the premise behind the US being born a republic. Not macroeconomics in particular, but insofar as it is a compromise between technocracy and majority rule and self determination. Philosophers and political theorist have been struggling with this since before Plato's Republic. Its a very very real question, though the consensus that democracy is the best thing we've got has been building for centuries.
  - rubashov 14y ago
    For calling the last three recessions surveys did better than economists' forecasts. You see similar results for forecasting and reporting current price inflation. I don't really buy that the common American man is an idiot. "Elites" have pushed most idiotic economic and foreign policy initiatives against the popular will. Americans have generally had to be tricked by lies and expensive PR campaigns into supporting wars, for example. Their initial judgments were sound.
cynicalkane 14y ago
This is an interesting topic but I'm not sure it has much to do with the fluctuations of nominal wealth. The trouble isn't people realizing that they're less wealthy in a philosophical sense, it's that they're realizing they're less wealthy in the ordinary dollar sense.
krschultz 14y ago
My mom used to push my dad to buy a 2nd house in Florida. They wanted to retire there and the prices were rising so fast she believed they never would be able to afford it if they didn't get one in 2005 or 2006. (They are retiring in the next 2013-2014 range). My dad always refused. He ran a medium sized manufacturing business (about 100 employees) and is certainly in the top 5%, but not the 1% of people in the country in terms of income. His rational at the time for not buying the house was very simple: "There aren't that many people in this country that can afford a house this expensive. It just doesn't add up to me. I know that most people don't make what I make, and if it's a struggle for me to do it rationally, something is wrong here". They didn't buy the house, but we all thought he was being too pride bound at the time. Now they're looking at what used to be 1.5 million dollar places that are going for $550-$600k. Meanwhile our house in New Jersey dropped in price roughly $100k because the bubble economics didn't take hold here as much. The bubble was absolutely crazy. At the end of the day there were a lot of people buying houses that they could only afford assuming the value of the house increased signifcantly before they sold them. Essentially they could only pay the carrying costs - and that was before the jobs market tanked.
eli_gottlieb 14y ago
The two factors aren't actually linked. My father got his original training as a city planner before going into IT, and NIMBY, combined with the desire for high property values, is the single most powerful political force in America. We simply don't have urban planning as it is practiced in most other countries, nor the land-value tax used in many places to drive urbanization. Though you may be interested in reading the essay, "The Problem of Scarcity".

cynicalkane 14y ago

When you hear economists advocate monetary stimulus, this is part of the reason why. Being over your head in interest not only sucks, it has real consequences for economic supply and demand. This is true both for consumers and "job creators".

anonymoushn 14y ago

This isn't so bad for the underwater homeowner. He or she can strategically default and the bank will likely choose not to foreclose so that it can continue to claim that the mortgage is worth its full value.

adventureful 14y ago
There are certainly very strategic ways to deal with it, but you're going to take a large hit on credit with any default. That can be a very expensive price to pay over time.
SwellJoe 14y ago
That isn't how it's working out for thousands (maybe millions) of homeowners who've defaulted, either strategically or because they lost their job and simply can't afford to keep paying for a mortgage on a house worth tens or hundreds of thousands less than they paid for it. Banks are foreclosing at an unprecedented rate, and even sometimes doing so on homes of people who haven't actually missed a payment. My parents neighborhood is now about 20% uninhabited, because of bank foreclosures. My parents are $70k+ in the hole on their house, purchased during the peak of the boom, and it would never cross their minds to default on a debt. $70k is a pretty devastating economic hit to a middle class couple, now living on savings and Social Security. It's easy for folks not impacted by the economic meltdown (like those of us in the tech industry) to make light of the very real pain a lot of lower income and middle class home owners are going through right now. But, the reality is that people are being screwed left and right by the very banks that caused the crisis.
- samstave 14y ago
  We need a google map which people can submit addresses to that have been foreclosed on. This will show the foreclosure rate in a way I would trust more than what the banks may be reporting.
  - SwellJoe 14y ago
    Not specifically what you're wishing for, but interesting data porn, nonetheless: http://www.npr.org/templates/story/story.php?storyId=111494514 http://www.npr.org/templates/story/story.php?storyId=1114945...

pessimizer 14y ago

When people think they have more money, they spend more money. https://en.wikipedia.org/wiki/Wealth_effect https://en.wikipedia.org/wiki/Wealth_effect

brudgers 14y ago

"As others have noted, it was wealth Americans never really possessed." If a person sold a house bought pre-bubble during the bubble, the wealth was very muched possessed. If a person invested money in real estate during the bubble, they very much lost wealth. Likewise, if their 401k took a hit when the stock market dove, or they cashed out their retirement savings when they lost their job, the wealth lost wasn't on paper, but very much real. Yes, some people's gains and losses were on paper, but for others, the losses were jobs, homes, and savings.

adventureful 14y ago
Real wealth can be realized through a sale of the asset (or in the case of cash, judged based on the real goods it can buy). If something can never actually be sold for whatever the supposed price is, then the value isn't real. The vast majority of the bubble premium could have never been realized under any scenario, and thus was not real (there wasn't even a fraction enough cash, bonds, equities, etc. to put toward realizing the real estate bubble's premium, the market could have never become actual through real sales). Only a fraction of US homes were sold during the bubble era. You can technically bid a stock to trillions in dollar worth (say Cisco goes to $25 trillion during the dotcom bubble), but you'll never be able to actually realize even a fraction of that value. And if you can't mathematically ever realize that value through a sale, then it is not actual.
- JumpCrisscross 14y ago
  You're talking about something between fire sale price and liquidation value; this far under-states value from an economic perspective. It is the equivalent of saying AAPL isn't worth $571 because if literally every holder of Apple stock decided to sell today they wouldn't get that price. It remains plausible that an astute family selling their house in 2006 or 2007 would have captured most if not all of the premium in their home's value to today's prices.
lifeisstillgood 14y ago
As every banker knows, debt is an asset. The bubble said everyones houses were worth 20 gazillion dollars. One person is persuaded to sell thier house for 10 million dollars, another borrows 10 m to buy it. The seller is very happy, The borrower is obligied to repay and the bank borrowed 8 m in someone elses cash and invented theremaining 2. Is there an economist who could tell me what that 2 m that gets created by bank lending actually does to inflation ?