Where did our net worth go?

With markets going quiet, it is time to look back on 2009.

One year ago, the terrible market panic post-Lehman had begun to abate, and all mice in the mortgage house eagerly awaited the Fed's purchases of mortgages. The economy itself was still in a freefall that was not to slow until spring, and tentative recovery in early summer flattened in the fall. However, flat beats panic. By a lot.

Most citizens still grope for a handle on the crisis. What had happened that made us so vulnerable? Four years ago, housing began to burst its bubble. Two-and-a-half years ago, in summer 2007, bad mortgage assets undercut the whole, immense pile of bad IOUs from here to Europe, fire sales and credit collapse fed on each other, and financial assets throughout the West began abrupt decline.

That was and is "asset deflation" -- not monetary or Consumer Price Index CPI deflation, just assets. The Fed prevented the mistakes of the 1930s: the banking system did not close, no deposits were lost, the money supply did not decline, and consumer prices held. However, great damage was done to household net worth, unlike any downturn since the '30s.

Net worth is what we have after we subtract liabilities from assets. Thus asset deflation after an all-time debt party cut net worths of all kinds, and the highly leveraged saw their net worths go negative.

The best detail and description of that stomach-dropping experience resides at www.federalreserve.gov -- click to view the "Balance sheet tables" document at this link: http://www.federalreserve.gov/releases/z1/Current/, and take a look at the first page (104). ...CONTINUED

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