The deep recession that hit Los Angeles and other parts of the U.S. four years ago is mostly tied to a deep fallout in the housing market, Federal Reserve Board Governor Sarah Bloom-Raskin said in a speech Thursday.
While speaking at the Federal Reserve Bank of San Francisco Business and Community Leaders Luncheon in Los Angeles, Raskin acknowledged areas in California were profoundly shaken by a deep contraction in housing not witnessed since the Great Depression.
To highlight her point about the role of housing in the downturn, Raskin noted that home prices plummeted 33% in the past six years, while they only declined 2% in the 1990s downturn and remained steady in the 1980s recession.
"Here in Los Angeles, the recent recession was even deeper than for the nation as a whole," Raskin said. "The unemployment rate, which was about the same as the national average prior to the recession, rose to a peak of nearly 13%. Moreover, the number of jobs in Los Angeles fell by a cumulative 9%, nearly half again as much as the decrease in national employment."
Raskin painted the current malaise in the U.S. and California economies as a tsunami of tight lending conditions, lost equity and lingering unemployment issues.
"Not only have the enormous loss of housing wealth, heavy debt burdens and tight credit conditions restrained household spending, but the accompanying wave of mortgage defaults has also had considerable repercussions for homeowners, lenders, communities and the pace of this economic recovery," Raskin said.
Loss in household wealth alone is a big problem, Raskin said, with drops in home prices erasing $7 trillion in household wealth.
"Home equity was a large share of the total assets of low- and moderate-income families prior to the recession, so the drop in housing wealth has hit many families particularly hard. Because wealth is one of the key factors that households consider when deciding how much to spend, the drop in housing wealth is expected to reduce household expenditures — the so-called wealth effect," Raskin said.