Economy Watch: U.S. Households Grow Richer

A Fed report shows a jump in U.S. household wealth during the first quarter of 2011; Treasury looks to punish three big banks for substandard performance in participating in HAMP; and the Fed is now the top U.S. creditor.

By Dees Stribling, Contributing Editor

U.S. household wealth increased $943 billion during the first quarter of 2011, according to the Federal Reserve on Thursday in its latest flow of funds report. Net worth for households was up at an annualized rate of 6.8 percent during the quarter, and household debt was down 2 percent, largely because of a drop in mortgages, but also because credit card debt shrank.

The most recent trough in U.S. household wealth was during the first quarter of 2009, when the aggregate was $49.4 trillion, down from the second quarter 2007 record high of $65.8 trillion. That peak has so far proved to be a multitrillion-dollar chimera, however. Total household wealth as of 1Q11 was $58.1 trillion.

Will the recent gains inspire more consumer spending, something the economy needs pretty badly at this juncture? Maybe. The gains were mostly spurred by advances in the equities markets, according to the Fed. Still holding household wealth back is houses, as their valuation continues to erode.

Big banks on the outs with Treasury over HAMP

The U.S. Department of the Treasury has said that it will withhold incentive payments to three of the country’s largest banks for their substandard performance in participating in the Home Affordable Modification Program, including such goings-on as stonewalling participating homeowners until foreclosure time rolls around. The three banks include Bank of America, JPMorgan Chase and Wells Fargo, and between them they collected $24 million in incentives during April.

Assistant Treasury Sec. Timothy Massad characterized the move as something more than bankers’ wrists being slapped, but the the amounts involved tell a different story. Between the three of them, for example, the financial giants had revenues of about $72 billion during the first quarter of 2011. Even if prorated into three monthly parts, the missing HAMP incentives would represent roughly 1 percent of monthly revenues for each of them.

These days, bankers are probably fretting more about their loss in the U.S. Senate in the matter of Federal Reserve regulation of debit card swipe fees, which will now go ahead as scheduled by the Dodd-Franks financial reform law. The lost revenue to the banking industry represented by the paring back of such fees is measured in billions per month, rather than measly millions.

Fed now top U.S. creditor

Who is the largest investor in U.S. debt? Not China any more, though the Middle Kingdom still has a large chunk, some $1.145 trillion worth, or about 12 percent of the outstanding total. According to a report by the Federal Reserve, the central bank itself is now the biggest U.S. creditor with $1.34 trillion, through the magic of QE2. That’s about 14 percent of the total.

Now that QE2 has almost run its course, the question is, who will pick up the slack and buy more U.S. debt? (Assuming that business of raising the U.S. debt ceiling is taken care of without spooking investors, that is.) Whoever it is, it seems likely that investors other than the Fed will ask for higher interest rates to make it worth their while.

Wall Street finally had an up day on Thursday, after more than a week of down days. The Dow Jones Industrial Average advanced 75.42 points, or 0.63 percent, while the S&P 500 gained 0.74 percent and the Nasdaq edged up 0.35 percent.

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