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Federal Reserve: Americans’ Wealth Fell 40% During Recession

The economic downturn that began five years ago did quite a bit of damage to Americans’ portfolios:

The Great Recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with middle-class families bearing the brunt of the decline.

The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992.

The biggest drops occurred among middle-income Americans, whose wealth was inextricably linked to the housing market boom and bust. Meanwhile, the wealthiest families actually saw their median income rise slightly.

The data represents one of the most detailed looks so far how Americans’ finances have weathered the economic downturn. It underscores both the depth of the wounds of the financial crisis and how far many families remain from healing.

“It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics. “We were in freefall.”

Not surprisingly, the biggest loss came in the real estate area:

The implosion of the housing market inflicted much of the pain. The value of Americans’ stake in their homes fell by 42 percent in those three years to just $55,000. The poorest families suffered the biggest loss of wealth from the drop in real estate prices. But middle-class Americans rely on housing for a larger part of their net worth. For some, it accounts for just over half of their assets. That means every step downward is felt more acutely.

Rakesh Kochhar, an economist at the Pew Research Center, calls this phenomenon the “reverse wealth effect.” As consumers watched the value of their homes rise during the boom, they felt more confident in spending more money even if they did not actually cash in on the gains. Now, the moribund housing market has made many Americans wary of spending, even if their losses are just on paper.

Perhaps we would all have been better off if, prior to 2007, people realized that the profits were just on paper too.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Ben Wolf says:

    The lost wealth never existed. That’s what happens when a boom is driven by ponzi finance. When the bubble bursts you end up back where the cycle started, during the early Clinton Administration.

    Highly-rated. Helpful or Unhelpful: Thumb up 20 Thumb down 2

  2. No actual wealth was destroyed during the recession. It’s not like someone woke up one morning to discover that since GM’s stock was down, their car had dissolved into the ether. This article suffers from two flaws in thinking:

    1) To the extent that people did lose wealth, that wealth was not destroyed, but moved to another party.
    2) We commonly act as though money and wealth are the same thing. While there is a proximate relationship between the two, they aren’t interchangeable. A lot of faulty economic think results from a failure to make that distinction.

    Like or Dislike: Thumb up 2 Thumb down 3

  3. Dave Schuler says:

    I wish I could hit the “Helpful” button on Ben Wolf’s comment more than once.

    Like or Dislike: Thumb up 4 Thumb down 1

  4. WR says:

    @Stormy Dragon: “1) To the extent that people did lose wealth, that wealth was not destroyed, but moved to another party.”

    Yes, it was transferred from the middle class to the super rich. And according to you, that’s supposed to make us feel better, somehow.

    Libertarians — got to love them. “Don’t worry about the fact we’re living in a cardboard box, Junior. Our wealth still exists, and now it’s helping Mitt Romney build an elevator for his cars.”

    Like or Dislike: Thumb up 8 Thumb down 1

  5. anjin-san says:

    The lost wealth never existed.

    I’m inclined to agree. I remember when people were paying 500K for houses in places like Lodi, Tracy, and Antioch CA, and wondering how the hell a home in any of those cities could possibly be worth anything near that. Hearing guys drinking $10 martinis talking about “cashing 75K out of the house” and going on about buying boats and trips to Vegas to play poker. They would strut around like they had just closed a deal that actually involved a profit.

    A mirage, except for the painful hangover. And the money made by the sharp operators fleecing the rubes.

    Like or Dislike: Thumb up 7 Thumb down 0

  6. al-Ameda says:

    That figure goes a long way toward explaining why we’ve had such an anemic recovery. A lot of wealth and income was vaporized and that directly affect aggregate demand. I think it’s amazing that we’ve had an anemic recovery, instead of a continued recession.

    Anyone who thought that by now we’d be clear of the effects of the 2008 crash was delusional.

    Like or Dislike: Thumb up 7 Thumb down 0

  7. @WR:

    Um, where did I say that was supposed to make us feel better, Mr. Projection?

    Like or Dislike: Thumb up 0 Thumb down 0

  8. JKB says:

    @Ben Wolf:

    Can’t agree with that. My local property assessor will not entertain the concept that the value of my property was only on paper. He wants his cash and is willing to use violence to get it.

    So while the wealth might have been ephemeral, the taxes aren’t.

    Like or Dislike: Thumb up 4 Thumb down 1

  9. Dave Schuler says:

    Another point that’s worth making: the loss of wealth was localized, it wasn’t smeared equally around the country. In some places the loss of wealth was much more than 40%. In others it was more like 10%. In yet others there was no loss of wealth at all.

    Like or Dislike: Thumb up 3 Thumb down 1

  10. anjin-san says:

    He wants his cash and is willing to use violence to get it.

    What do you want? Roads to drive on perhaps? Policemen and firemen that come when you call? National defense? Food that will not send you to the hospital?

    Of course you want all these things. You just don’t want to pay for them.

    Like or Dislike: Thumb up 6 Thumb down 2

  11. Herb says:

    Considering that MOST wealth exists only on paper these days….I don’t think I’d say it “never existed.” It existed. It was right there in black and white.

    And now it’s gone.

    (My house is worth around 60K now. It was worth 130K when I bought it. If I owned the place outright, that would be very real 70K loss…..10 grand more than the current value! But since I’m financing it, the losses are even greater. I’m paying a 130K note for a 60K property. If I stick it out, I will eat the loss myself. If I walk away, the bank loses. But in neither scenario are the losses hypothetical.)

    Like or Dislike: Thumb up 1 Thumb down 0

  12. Buzz Buzz says:

    Federal Reserve: Americans’ Wealth Fell 40% During Recession

    Drones of the OTB Hive: No it didn’t!!! Everybody just imagined it! Life has been nothing but rainbows and unicorns since the Democrats were put in power and implemented their New Direction for America and Hope and Change policies! The chocolate rations have increased!

    Like or Dislike: Thumb up 1 Thumb down 8

  13. Moosebreath says:

    And of course, the pain of losing net worth was not equally distributed. And guess which decile of the population actually saw an increase to net worth over the recession:

    The top one. More reasons to ignore the drum circles.

    Like or Dislike: Thumb up 2 Thumb down 1

  14. Moosebreath says:

    To clarify, the graph in the link is the changes over the last decade.

    Like or Dislike: Thumb up 0 Thumb down 1

  15. I did not down-vote Ben Wolf, but his argument is against an unknowable.

    Remember, value is a liquid concept. It’s a noob mistake to assert a “real” value for any good or service. Prices are set and reset continuously at the margin.

    When he says “the lost wealth never existed,” he is making the astounding assertion that every nickle of pre-2008 valuation was imaginary, and will never come back.

    Actually, a lot of that wealth has come back. Does that mean it doesn’t exist, again?

    Like or Dislike: Thumb up 0 Thumb down 1

  16. @Herb:

    I think some areas have made the turn, and prices are climbing. Good luck to you.

    Like or Dislike: Thumb up 1 Thumb down 0

  17. al-Ameda says:

    @Buzz Buzz:

    Drones of the OTB Hive: No it didn’t!!! Everybody just imagined it! Life has been nothing but rainbows and unicorns since the Democrats were put in power and implemented their New Direction for America and Hope and Change policies! The chocolate rations have increased!

    Conservatives are definitely the ones in denial. They actually believe that the Bush Administration’s crash of 2008 was a trifle, and that we should have been well on our way to a robust recovery despite the vaporization of $14 Trillion in wealth and income from the economy.

    Like or Dislike: Thumb up 2 Thumb down 1

  18. Ben Wolf says:

    @john personna: Wealth based on an asset bubble requires infinitely accelerating debt to sustain it. But that debt is unsustainable and the “wealth” derived from it is also unsustainable. The process is endogenous to finance and ultimatey doesn’t translate to growth in financial assets.

    Like or Dislike: Thumb up 1 Thumb down 2

  19. @Ben Wolf:

    Wait a second, doesn’t your whole philosophy of money creation require an “infinitely accelerating debt?”

    (Not just you, more traditional views of the Federal Reserve, the Taylor Rule, etc.)

    What you did in your first comment was say that at some specific point, in 2009, you could declare the correction “perfect” and that “the lost wealth never existed.”

    I’d say it differently. In July 2008, every recorded price was as real as it was going to get, and in July 2009, every recorded price was as real as it was going to get.

    I’m sure people with entirely rational strategies got slagged in that bad year in-between, and that it’s insane to say their “wealth never existed.”

    Like or Dislike: Thumb up 0 Thumb down 0

  20. (Since populations expand exponentially, so can money and debt. The fine call on a “bubble” is when something expands too fast, and out of sync. We definitely had a real-estate bubble, but the trick is that we will again. No one has the authority to name a price that is “real” between now and then.)

    Like or Dislike: Thumb up 0 Thumb down 0

  21. For extra credit, consider the Vanguard REIT Index Fund.

    Their 10 year “Hypothetical growth of $10,000”, down in the bottom right of that page, shows a bumpy ride.

    Are you going to tell us at what moment in time the wealth it represents was or is “real?”

    Like or Dislike: Thumb up 0 Thumb down 0

  22. Herb says:

    @john personna:

    “I think some areas have made the turn, and prices are climbing. Good luck to you.”

    Thanks, bud. I’m riding it out for now. But I’m one plumbing problem or broken window from cutting my losses and sticking Jamie Dimon with the bill.

    I don’t want to do that because I like being a home-owner, have been doing all of this with the intent of paying off the note (not cashing in on the craze), and I’ve busted my ass for my credit score. But them’s the breaks.

    (I’d like to add that paying your mortgage on time, paying extra principle, and cutting your grass every week are not rewards unto themselves. If your neighbors foreclose, it will all be for naught.)

    Like or Dislike: Thumb up 0 Thumb down 0

  23. Buzz Buzz says:

    @al-Ameda:

    You can keep trying to blame the Republicans, but reality and the facts are against you.

    Jun 16, ’06: DEMOCRATS CALL FOR A NEW DIRECTION FOR AMERICA

    It didn’t take long after Democrats took over both houses of Congress for them to plunge America into a recession.

    And then after Democrats took over the White House, they managed to Change the recession into a Depression.

    By now it’s obvious that Americans prefer the old direction, when things were getting better not worse, and when they didn’t have to Hope that they would survive the Democratic Change that has cost them 40% of their wealth so far.

    Like or Dislike: Thumb up 0 Thumb down 4

  24. @Buzz Buzz:

    Perhaps this is a good point to remind readers in this thread that the US crash was part of a global cycle. Perversely, the US debt crisis, and house bubbles in other developed nations, was actually made possible by a savings glut, arising in developing economies.

    If you’ve never heard the story, you can here.

    I don’t fault Bush II or the GOP for creating that dynamic. They did not. I just say that they should have seen the bridge out, and applied the brakes.

    Like or Dislike: Thumb up 3 Thumb down 1

  25. Buzz Buzz says:

    @john personna:

    The Democrats took over both houses of Congress on their 2006 platform of a New Direction for America. Within a year they managed to plunge America into a recession.

    Obama promised Hope and Change in 2008, and won the White House. He managed to change the recession into a depression and wipe out 40% of Americans’ wealth.

    I’m sure your fairy tale of how this was just a series of unfortunate events beyond anyone’s control (except that it’s somehow still the GOP and Booooosh’s fault!) once the Democrats were put in charge is very entertaining and comforting to the drones of the hive, but the rest of America is fed up with the way the Democrats have destroyed the economy and is ready to go back to the days when people had jobs.

    Like or Dislike: Thumb up 0 Thumb down 6

  26. Moosebreath says:

    “Obama promised Hope and Change in 2008, and won the White House. He managed to change the recession into a depression and wipe out 40% of Americans’ wealth.”

    Wowee! Obama’s Jope and Change powers are so strong, they can cause a depression which started before he was even elected!

    Like or Dislike: Thumb up 1 Thumb down 1

  27. Herb says:

    @Buzz Buzz:

    “The Democrats took over both houses of Congress on their 2006 platform of a New Direction for America. Within a year they managed to plunge America into a recession.”

    Ah, he discovers a correlation. He gets a cookie.

    I hate to say it, but part of me hopes Mitt Romney wins, not because I prefer his policies over the incumbent’s, but because I’m sick of the excuses and the finger-pointing. I want to say, “Here, you got what you wanted. You’ll get your tax breaks and giveaways. You’ll get your union-busting and deregulation. Once again, you’ll have someone in office looking out for only you. Now quit your bitching and go create a $#%^& job already.”

    Like or Dislike: Thumb up 1 Thumb down 1

  28. Buzz Buzz says:

    @Moosebreath:

    Wowee! Obama’s Jope and Change powers are so strong, they can cause a depression which started before he was even elected!

    Yet again, facts and reality smack down an OTB drone’s talking points.

    Obama was elected with the rest of the New Direction for America Democratic majority in 2006, which promptly drove America into a recession.

    Like or Dislike: Thumb up 0 Thumb down 1

  29. @Buzz Buzz:

    Did you address the global cycle at all?

    How did Dems taking over the US congress cause a housing crash in Finland?

    Like or Dislike: Thumb up 3 Thumb down 1

  30. Ben Wolf says:

    @john personna:

    Wait a second, doesn’t your whole philosophy of money creation require an “infinitely accelerating debt?

    No. In fact one can argue it’s the exact opposite. And it isn’t a philosophy, it’s happening right now, every single day.

    I’d say it differently. In July 2008, every recorded price was as real as it was going to get, and in July 2009, every recorded price was as real as it was going to get.

    Markets determine prices, not value, and the nature of our financial system allowed ponzi financiers to game assets in such a way that prices vastly exceeded “real” value which could be supported by factors like money supply, velocity, demand and productive capacity. There’s a solid basis for proper valuation, and ponzi debt schemes (which were the primary force behind the asset bubble) are destined to fail once growth stops.

    That’s why the wealth never existed: it had a detonator attached to it set to go off once the non-government sector could no longer increase its leverage.

    Like or Dislike: Thumb up 0 Thumb down 2

  31. Buzz Buzz says:

    @john personna:

    The topic was how Obama and the Democrats managed to destroy 40% of Americans’ wealth with the recession they caused in America.

    Perhaps someone else is stupid enough to fall for your “It’s Finland’s fault!” squirrel tactic, john; I’m not.

    (I note with amusement that the Finland defense is never mentioned whenever you and the rest of the OTB drones are trying to pin everything on the evil GOP and Boooooooooooooosh!)

    Like or Dislike: Thumb up 0 Thumb down 1

  32. legion says:

    @Buzz Buzz: So, you think the recession was caused by policies implemented in 2006? Fail. Complete and total fail. The recession – specifically, the housing & mortgage market bubble that drove it – was caused by two major issues: deregulation of banks in the late 90s that allowed them to become directly involved in things like CDS’s and the systematic dismantling of the Executive branch’s regulatory oversight in the early 2000s that allowed those same banks to make absolutely ridiculous transactions without anyone questioning fiduciary responsibility. By 2006, the hammer had already started dropping; I’m not sure what Congress could have done by then to even mitigate it, let alone stop it.

    Like or Dislike: Thumb up 5 Thumb down 1

  33. Moosebreath says:

    Buzz Buzz,

    “Yet again, facts and reality smack down an OTB drone’s talking points.

    Obama was elected with the rest of the New Direction for America Democratic majority in 2006, which promptly drove America into a recession.”

    And yet you said, “Obama promised Hope and Change in 2008, and won the White House. He managed to change the recession into a depression and wipe out 40% of Americans’ wealth.” In other words, the event which you were citing as causing the change from a recession to a depression was performed by Obama after he won the White House.

    Go back to pollinating flowers.

    Like or Dislike: Thumb up 1 Thumb down 1

  34. Ben Wolf says:

    @legion: The housing market was already in distress in 2006 and Democrats didn’t assume control of Congress until 2007. Methinks Mz.. Buzz Buzz is being just a little disingenuous.

    Like or Dislike: Thumb up 2 Thumb down 1

  35. Drew says:

    I had the same reaction Schuler had, can I click Bens thumbs up 20 times? The only possible modification is to augment Stormys reaction, builders probably got a wealth transfer. But in the aggregate, Bens right on the, ahem, money.

    As usual, JP has his head up his ass.

    Like or Dislike: Thumb up 1 Thumb down 2

  36. Drew says:

    Legion

    Get a clue. The biggest deregulation that affected housing was signed into law by William Jefferson Clinton. GS repeal. Some would also say his cap gains wrt housing decision. Some economic miracle.

    Like or Dislike: Thumb up 1 Thumb down 2

  37. @Buzz Buzz:

    Perhaps someone else is stupid enough to fall for your “It’s Finland’s fault!” squirrel tactic, john; I’m not.

    Patiently, John explained that no, Finland was not put forward as a cause, but as a point-example in a global epidemic.

    Collected history here:

    As of 2007, real estate bubbles had existed in the recent past or were widely believed to still exist in many parts of the world,[6] especially in the United States, Argentina,[7] Britain, Netherlands, Italy, Australia, Canada, New Zealand, Ireland, Spain, Lebanon, France, Poland,[8] South Africa, Israel, Greece, Bulgaria, Croatia,[9] Norway, Singapore, South Korea, Sweden, Baltic states, India, Romania, Russia, Ukraine and China.[10] Then U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that “at a minimum, there’s a little ‘froth’ (in the U.S. housing market) … it’s hard not to see that there are a lot of local bubbles.”[11] The Economist magazine, writing at the same time, went further, saying “the worldwide rise in house prices is the biggest bubble in history”.[12] Real estate bubbles are invariably followed by severe price decreases (also known as a house price crash) that can result in many owners holding mortgages that exceed the value of their homes. As of the end of 2010, 11.1 million residential properties, or 23.1% of all U.S. homes, were in negative equity at Dec. 31, 2010.[13] Commercial property values remain around 35% below their mid-2007 peak in the United Kingdom.[14] As a result, banks have become less willing to hold large amounts of property backed debt, a likely key issue in affecting a recovery worldwide in the near term.

    As was famously described in Irrational Exuberance, the housing bubble grew suspiciously in “jet set cities” around the world, in synchronicity.

    Like or Dislike: Thumb up 1 Thumb down 1

  38. @Drew:

    I don’t see anyone making a rational counter-argument. “Price is not value” is a noob mistake, repeated.

    In a market economy there is only price.

    And, as that REIT illustrates, price is back up.

    Like or Dislike: Thumb up 1 Thumb down 1

  39. Now, we certainly would like to know future price, and we might think internally think that value drives that, but no.

    How about a little example of unexpected price … I tie flies. I buy hackle feathers periodically. They are somewhat prepared for fiy fishers, and somewhat a secondary product of a much larger poultry trade. As you may know, last year girls decided to hang hackle feathers in their hair. Prices exploded. Stocks dwindled.

    It was fashion. But then, what isn’t?

    (Someone could try to name the “value” of a feather, or the “value” of a house, or the “value” of a used car, but if he names anything other than the market-made price, he is getting lost. He is one piece of the market, out of millions of active players. No single player can say what a price should be, what value is. He can only say where he’d buy, or sell.)

    Like or Dislike: Thumb up 0 Thumb down 1

  40. In a [global] market economy there is only price.

    Bubble happen, because people anticipate overly high returns or overly low risk, and bid up good or services based on their rosy projection.

    You can have bubbles, even see them coming, without making silly claims about what values should be, or what prior wealth was “real.”

    Like or Dislike: Thumb up 0 Thumb down 1

  41. Andy says:

    JP,

    So, there’s no such thing as value, only price? Maybe you should call Warren Buffet and tell him his value investing strategy is a “noob mistake.”

    Like or Dislike: Thumb up 1 Thumb down 0

  42. @Andy:

    When people like Warren talk about “value investing” they are modeling future price.

    They are probably smart enough to distinguish that from the “intrinsic price” that Ben is arguing.

    (Note that value investing is consistent with the Keynesian beauty contest, in that it looks for special cases. It looks for fundamentals which will later be valued and priced by the market. This dependence on later pricing is key.)

    Like or Dislike: Thumb up 0 Thumb down 1

  43. There is no doubt that many smart people through around “value” in a shorthand way, meaning kind of a price with some current emotional distortion removed. It works that way, as a shorthand.

    But even as you say “this X is under-valued” or “this Y is over-valued” that you are playing a game with futures, and future price assignments.

    Like or Dislike: Thumb up 0 Thumb down 1

  44. Edits:

    They are probably smart enough to distinguish that from the “intrinsic [value]” that Ben is arguing.

    But even as you say “this X is under-valued” or “this Y is over-valued” [know] that you are playing a game with futures, and future price assignments.

    Like or Dislike: Thumb up 0 Thumb down 1

  45. legion says:

    @Drew: Where exactly do I deny that? I’m taking issue with BB’s ridiculous assertion that Obama and the Congress of ’06 caused the recession – something your point supports.

    Like or Dislike: Thumb up 2 Thumb down 1

  46. Ben Wolf says:

    @john personna:

    Bubble happen, because people anticipate overly high returns or overly low risk

    This contradicts your assertion that there is no difference between fundamental value and market price. Buffoons and charlatans chase prices because their whole shtick is cutting and running before the other suckers do. Value investors will often discount price when they conclude an opportunity is solid and has what it needs to grow.

    Value and price are related but are not always the same thing.

    Like or Dislike: Thumb up 0 Thumb down 1

  47. @Ben Wolf:

    Let’s back up and look at the book definition of intrinsic value (finance):

    In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value. Simply put, it is the actual value of a security as opposed to the market or book value.

    I submit that this sort of calculation is only meaningful for short-term and low-risk bonds.

    For any other goods or service, uncertainties multiply.

    Now, let’s go back up to the top, where you said:

    The lost wealth never existed.

    You were talking about owner-occupied home prices, primarily. Was there ever a good, rational, intrinsic value for owner-occupied housing?

    The financial calculation of incremental return is certainly out. We receive no interest or rent on homes we occupy. There is only this nebulous expectation of future market price.

    So that’s a long way to answer your question, but the illustration is our primary example. Of course you can have bubbles without anyone knowing intrinsic value. See owner-occupied housing.

    Like or Dislike: Thumb up 0 Thumb down 1

  48. anjin-san says:

    It’s worth noting that Fox & Friends falsely claimed that this drop took place during the last three years, and that Mitt Romney, who was being interviewed at the time was either unaware that that is incorrect, or he knew and passed on a chance to set the record straight.

    Also worth noting – A separate Fed survey released last week showed that total family net worth actually climbed 4.7 percent in the first quarter of this year, putting it at about 28 percent above recession lows

    http://2012.talkingpointsmemo.com/2012/06/fox-and-friends-fed-romney-doocy.php?ref=fpnewsfeed

    Like or Dislike: Thumb up 1 Thumb down 1

  49. I will stipulate that “value” is real, as I say, in short-term and low-risk bonds.

    Of course, term and risk are fuzzy concepts here. I’m sure people bought PIIGS bonds, shortly before they were termed PIIGS, thinking that they had the intrinsic value nailed.

    In the end, there is only price.

    Like or Dislike: Thumb up 0 Thumb down 1

  50. @on this:

    BTW, some people will make a really huge mistake, and try to calculate intrinsic value for own-occupied homes based on the equivalent rent.

    It only takes a moment’s reflection to recognize that both price and rent are influenced by the same external forces – fashion, regional desirability, regional employment, etc.

    Like or Dislike: Thumb up 1 Thumb down 1

  51. al-Ameda says:

    @anjin-san:

    It’s worth noting that Fox & Friends falsely claimed that this drop took place during the last three years, and that Mitt Romney, who was being interviewed at the time was either unaware that that is incorrect, or he knew and passed on a chance to set the record straight.

    Fox creates the news that many want.

    Like or Dislike: Thumb up 0 Thumb down 0

  52. al-Ameda says:

    @Buzz Buzz:

    The topic was how Obama and the Democrats managed to destroy 40% of Americans’ wealth with the recession they caused in America.

    The crash of the financial, credit and housing markets happened in 2008 – prior to the inauguration of President Obama.

    There, you just learned something.

    Like or Dislike: Thumb up 1 Thumb down 0