US household assets boomed and busted in the last recession
The pandemic had many surprising effects on the economy. For example, many American families became much richer. That wealth effect is now being unwound.
The following chart displays the evolution of US households’ financial assets three years before and three years after the beginning of various recessions (that’s the “0” in the middle of the x axis).
One look will tell you that the Covid-19 shock was an extreme outlier. Thanks to unprecedented fiscal and monetary stimulus, stock prices and real estate surged. Compare that to the effect of the recession that started in 2007 – the lowest line graphed on our chart.
Now, however, we are seeing a big reversal as the Federal Reserve tightens monetary policy rapidly to bring down inflation. Equities are in a bear market as a result, and the US housing market is under pressure as well.
Financial assets are still more highly priced than they were pre-pandemic. But the current plunge is probably a necessary reversion to the mean. The economics professor Ricardo Caballero argues that it was optimal to use monetary policy to boost asset prices beyond their fundamentals when the economy was in shock and US interest rates could not fall below zero; now, it’s natural for asset prices to retreat while GDP catches up.