Elizabeth Warren discusses how the dreams of the middle class american family are being depleted by the dramatic increase in bankruptcies and foreclosures. Warren discusses the role that credit card companies and ballooning interests rates have played in rapidly increasing mortgage rates as well as the how the over consumption myth is clouding our understanding of the average middle class family, who is in fact experiencing a lower standard of living than their parents and still finding themselves one payment away from losing their home.

Educational Video from The Massachusetts School of Law.

The transcript of this show can be found below…

Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School and chaired the Congressional Oversight Panel created to investigate the U.S. banking bailout and joined The Massachusetts School of Law’s Books of our Time to discuss her book, The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke.

This program originally aired in April 2004. it is being re-aired because Professor Warren’s predictions of economic disasters and the reasons for them have proven correct, and she is a candidate to head a commission to guard against recurrence.

The Massachusetts School of Law also presents information on important current affairs to the general public in television and radio broadcasts, an intellectual journal, conferences, author appearances, blogs and books. For more information visit http://www.mslaw.edu

This is a very rough transcript of The Massachusetts School of Law’ s Books of Our Time interview with Elizabeth Warren, The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke.

This transcript was downloaded via YouTube’s Machine transcription.

This program originally aired in April 2004. it is being re-aired because Professor Warren’s predictions of economic disasters and the reasons for them have proven correct, and she is a candidate to head a commission to guard against recurrence.

Welcome to Books of our time produced by the
Massachusetts school of law
in the last thirty five to forty years women
have entered the workforce in huge numbers
this did not result however in families having
an easier time of it financially as lots
of people thought it would
financial difficulties may if anything be
more widespread among families today
today we should discuss the book about the
situation called the two income trap
its authors are Elizbeth Warren a professor
at the harvard law school and her daughter
Amelia Warren Tyagi a consultant
with me to discuss the book is professor elizabeth
Warren and I am Lawrence R Velvel Dean of the
Massachusetts school of law
thank you Elizabeth for being with us today
why don’t we start out by you describing the
the degree to which the extent to which
bankruptcies have increased
dramatically indeed
in the last ten to twenty years
in the early nineteen eighties
we’ve had about
three hundred thousand bankruptcies in the
united states
last year annually annually
last year we had about one point six million
families who filed for bankruptcy
that’s about five hundred percent increase
that’s right
and and
what you want to note about these families
is that
they are in
terrible financial trouble at time they filed
for bankruptcy
on average
the families who filed for bankruptcy
owed more than a year’s worth of income
in credit cards and other
short-term high interest debts
forty or fifty thousand dollars a year
well the average family filing for bankruptcy
has a lower income at the time they file for bankruptcy
more in the range of about thirty thousand
dollars a year still pretty hefty but the point is
most of the families who file
really have no option if they don’t file
for bankruptcy
the interest rate is running
so that if they don’t charge another thing
they don’t incur another debt
they nonetheless
next month will owe more
than they owe this month
the month after that a little more and the
month after that more
for most of the families who filed for bankruptcy
it really is just a declaration of financial
death
they can’t go along
any longer
and that’s how they interact in bankruptcy
the a quick calculation here tells me
that
I think that the
population of theunited states has increased from
roughly
two hundred forty million to roughly three
hundred million since nineteen eighty
so the population
has grown twenty five percent
the number of people in bankruptcy has
gone up five hundred percent and that is twenty
to one
thats right or another way to say it
is that
the rate of filing
for thousands of the population
has just about quadrupled
in a little over twenty years in the united
states
you know we should add to this
it’s important to note the bankruptcy numbers
but the bankruptcy numbers are not alone
the bankruptcy numbers which is one signal
for the kind of trouble American families
are in
take a look at
home mortgage foreclosure rates these are people
who have passed
the most
vigorous credit screen that we have for
consumers in the united states
and what’s happened at home mortgage for foreclosures
over the last twenty five years
they’re up three and a half fold
that’s remarkable particularly because interest
rates are low today and housing taxes are
strong so when you get into financial trouble
if you’re a homeowner
many people can just back out of it and sell
the house to someone else unless it’s too loaded
down with debt well we’ll come back to that
because one of your
many significant points
is that even if it is today currently
one of the most significant credit checks
that you can pass in the united states
it’s not much of a credit check anymore
you you make the point early on in your
book
that bankruptcy is
I think it’s fair to say predominantly
or at least largely a middle class phenomenon
I’d like you to elaborate on that and tell
us if you have any statistics showing that
sure
you know most people define middle class by
income
and by income
I will be the first to confess a large proportion
of the families in bankruptcy look like they’re
poor or at the ragged edge of the working class
middle class
but income alone doesn’t really define class
a fourth grade teacher
lost their job
and was out of work for a year would you describe
them as not middle class any longer
if the bank President
lost his job
would you describe him as not middle class
any longer
if we look at the enduring criteria
education
occupation having bought a home
it turns out that
population in bankruptcy is disproportionately
middle class
so if we take anyone who went to college
that’s some indication of being middle class
anyone who has an occupation in the upper
eighty percent
of occupations in the united states that is
cutting out
day laborers house maids and the lower
status jobs
or anyone who actually went out and bought
a home
as middle class
our population in bankruptcy
is more than ninety percent
middle class
in other words
when we look at the families who are filing for
bankruptcy
it’s not the very poorest and of course it’s
not that the richest
we under represent
brings surgeons and now college professors
but we also under represent
day laborers and shop clerks
bankruptcy is about the middle class and the
kind of financial trouble
that the middle class faces
you know elizabeth
just so people understand
that defining a class by aspiration
is nothing new
we all know
of the impecunious aristocrat
in england for example who was not considered
any the less
an aristocrat
I was just reading today a book by Richard pipes one
of your colleagues
about the terrorists
a fellow named tagayev
one of the terrorists of the eighteen eighties in
Russian an impecunious aristocratic
family
but defining people by aspiration is nothing
new
and that’s really all you’ve done
and you know
it’s particularly important in bankruptcy to understand
them that way
two out of every three families that file for
bankruptcy
have had a significant
job interruption
before they filed for bankruptcy somebody’s
lost a job someone’s had a serious cutback
in the cases of husbands and wives which will
be talking about in a minute
often both of them have lost a job before the
bankrupt filing
so we’re really talking about people
who are way down on the income side
but who in terms of their own
aspirations class status
vision of themselves
our solidly middle-class people
you make the point which I think is
very intimately related
that % these are fundamentally people that
I’d like you to explain what you
mean by this
these are fundamentally people who play by
the rules and the reason I think this is related
you might comment on this as well
these folks went broke trying to be middle
class
I wish it were otherwise
I have to tell you our research started
with a single fact
and that is the likelihood
of a family with children
would end up bankruptcy
we discovered
that families who have children in the household
are nearly three times more likely
to end up filing for bankruptcy than families
who don’t have children
this whole book
was an enterprise to try to understand that
because I could understand a story that says
the young and irresponsible we’re going bankrupt
they’re out there fresh out of college
they have those newly minted credit
cards and they’re just saying charge it charge it
charge it too often I can at least understand
that story
I can’t understand a story about the elderly
that’s says declining health limited incomes
no prospects to earn more in the future too
little set aside for retirement
they’ll go broke in greater numbers
I can even understand a story about singles
who are self indulgent
but tell me a story
about
how it is that
married couples or that women or men trying
to raise children on their own
would be at
disproportionate risk
for going bankrupt and
it doesn’t add up
two a story
of people who are hooping off money on
fancy things they can’t afford
what our date ultimately show is
the principal reason these families end up
in bankruptcy
is they’re trying to make
mortgage payments
health insurance payments
car payments they now have to have two cars
when they have both mom and dad in the work
force
and child care
payments and that by the time they
make those four payments
today’s two-income family the focus on what
was supposed to be our economic success story
has less money left over than their one income
parents had a generation ago
Elizabeth we’ll get into that extensively
but one of the you say this surprises you
well uh
it doesn’t surprise me I guess my question
is why should it surprise you because
my own children one of my own and kids
is going through this now and I went through it
and i’d be surprised if most people don’t go through
it
when you have children
boy your expenses leap astronomically
and %uh every book
I’ll tell you a story I went to Washington in
nineteen sixty three with my wife immediately after
graduating from law school and I made seven thousand
a year my wife made five thousand a year
we made a total of twelve thousand a year we
were rich as pigs
you know a few years later we had kids and
I was making more money and boy were we in
the poor house
so why is this a surprise
well
in one sense it’s a surprise because all that we
read now
in the popular media and actually many of the
finger waggers out of Washington
and that is that Americans are spending too
much on stuff
that the reason they’re going broke is they’re
going broke because of too many game boys too many
sneakers that costs two hundred dollars
too much consumption too much consumption
but let me get back to what these data show
what these data show
is that todays family with children
it’s going broke
over the basics
what’s happened in the last generation
is a fully employed fathers wages a mans wages
have gone up as we know less than one percent
depending on the data you want to look at
they’ve actually declined slightly or stayed
flat when adjusted for inflation
but the family income has gone up seventy
five percent in that period why because they’ve
added a separate worker
the standard household Mom dad and two kids
but that family today
by the time it makes its mortgage payment
it’s health insurance payment it’s car payment
and its after school or its
preschool care for its children
the payments for those four things
in that family today has
let’s money left over
than the one income family had a generation
ago so with
two people in the workforce all the added expenses
of lunches out
their clothes and gasoline to get to work
the underlying reality
is that todays two-income family
is having to spend so much more
just for the core
just for the basics just for the mortgage
and health insurance and the car and preschool
than parents had to spend a generation ago
and thats what it is thats driving them into bankruptcy
so in other words
and one sense that you can say yes we always understood
having children is expensive
but what’s happened in a single generation
is the cost of having children has shot way out of reach
of the of the average median earner
I want to come back to that in just a moment
because %uh
a I want to come back your idea that
in effect it is what you call fixed costs
those are not fixed costs in the economy sense but
they are fixed costs in the human sense
but before we do that
isn’t the real problem here
maybe a problem
%uh when you point out for example that the
income and
inflation adjusted
basis everything equal
is seventy five percent
and yet people are going broke
the problem is that the cost of
living index
from nineteen seventy three to
now is up four hundred percent and from nineteen
sixty to now is up six hundred percent
family would have to be making depending
what year you choose
four hundred percent more or six hundred percent
more not seventy five percent more
it’s a nice way to put it
indeed
one of the things that interesting to look
at when you compare family budgets
from I just picked the early nineteen seventies
tried to pick that is one generation so we’re
not loading the numbers by moving back into
the fifties or even sixties
so in thirty years
what’s happened is that typical budget
for the typical family
clothing
families today surely are spending more
on clothing
what the data show when you
pull them apart and you adjust for inflation is
that todays mom dad and two kids
is spending twenty one percent less
for clothing
than a family spend a generation ago
how about food
today’s families are eating out more than ever so
lets add it al together how much family spent at the
grocery store how much they spend eating
out
all that designer water that they buy that
nobody but a generation ago
what’s happened
today’s family is spending twenty to percent less
on food including eating out
then they spent a generation ago
appliances everyone wants to talk about how
todays family has
microwave ovens ovens and
popcorn poppers is an espresso machines that
we didn’t have a generation ago in
inflation adjusted dollars today’s families
are spending forty four percent less on appliances
then they spent a generation ago
less on furniture less on floor coverings
let’s on tobacco a little more on alcohol
its understandable i think so but the real point
here
is that
Americans
have actually cut
where they spend
they are spending
on these big
costs that
in human sense the fixed costs once you’ve committed
to that mortgage once you
committed to make health insurance payments
what you’ve committed to make those car payments
they’ve committed to
big fixed costs
that they have to make
month after month after month and today
it takes
two salaries
just to make this fixed costs and families have
actually ended up spending less
in all those categories where there was at
least
some discretion in the past
now to argue with it but let me make the opposite
point and see how you respond to it
and not to argue with you thats what people see before
they argue with you I can take it
I’m sure you can
at harvard law school you probably get it every day
even though
what people are spending less
on a lot of consumer goods proportionately
their spending less than they were twenty thirty years ago
nevertheless
when you’re financially close to the bone
shouldn’t people avoid spending money
on
eating out
home entertainment centers
shouldn’t they buy particularly given the increased
equality of cars in the last twenty years
you know a car these days is nothing for a car
to go fifty or two hundred thousand miles
shouldn’t they be buying used cars in other words
putting aside the question of mortgages for
one moment because mortgages and schools seem
to me to be the really big problem and I think
you present them as such
putting those aside for just one moment
are there ways people ought to be cutting
back
to give the ove-rconsumptionists their
due one might say
we all have an intuition don’t we
and I don’t know if it’s born of the newspapers
if it’s born of casting a
covetous
eye at what the neighbors are purchasing
I don’t know
for sure where it comes from let me put it this
way
most of the families who are in financial
trouble
have cut back until there is is no muscle left
so the median family who files for bankruptcy
their cars are nine to eleven
years old
there not driving new cars
most of them haven’t bought new clothes in
they bought shoes for for the kids because you have no options
there
and they’ve dressed their children and hand-me-downs
to the extent that they can
for the families who are in real financial
trouble
talking about cutting back
it’s often a cruel joke
these are families
we’ve done everything they can in the small ways
they’ve clipped every coupon they’ve bought pasta in
bulk
they haven’t bought new cars they haven’t bought
new clothes
they don’t have cable in the television
not if you want to move
to those who are a little more financially secure
no doubt about it
there’s a segment of the American population
has spent a lot more
they’re spending a lot more on clothing
they’re spending a lot more on food they’re having
a great time
but we don’t want
to be fooled
by looking at the lives of the upper
twenty percent that
that’s what’s happening in the median
indeed the way I’m coming to understand much of
the economics of the family
is that America
could have been described for most of the
twentieth century
as economics that looked like this
there weren’t many people at the bottom there
weren’t many people at the top
people were mostly clustered in the middle
and the people in were mostly making it
they were mostly doing pretty well
in fact let me give you the average
in nineteen seventy one the average family
remember a one income family
was putting aside eleven percent of its take-home
pay in savings
and it was carrying only three percent
of its take-home pay in car payments credit
card payments
other kinds of
consumer payments other than mortgage
now let’s take a look at what’s happened in
the middle
by the year two thousand two
the median family
is putting away about one percent
of it’s take-home pay
in savings
they’ve got mom and dad at work they’re putting
away about one percent
and now carrying twelve percent
of their take-home pay on
car payments and
principally now credit card debt
in other words these families are upside down
financially
what we’re starting to see is more pressure
toward the two ends
if you will
something of a hollowing out
in the middle
a lot of people who were middle class families whove
clipped coupons bought pasta in bulk
and who are waking up in the middle of the night
scared
let me ask you a question we’re supposed to go to a break
now but I want to ask you this question first and then
we’ll go to the break
I don’t remember reading in the book
maybe i missed it
normally i’m a pretty careful reader
don’t miss too much
I think
but I remember reading in the book some of
the things that you’ve just said
as for example the people who are entering bankruptcy
are driving nine and ten-year-old
cars
cut back on clothes and cut back on food
and I I think that’s a very crucial point
that you make and
doesn’t that point also mean
that bankruptcy is the middle class
phenomena by aspiration
what we’re seeing is
lots of families who seek
middle classness
so to speak
are actually descending into
the poor because of the economic situations
is too much for them
one of the things that was most wrenching
about doing this research
was that we not only collected questionnaire
data
for most families and collected all of the
information out of the court records which
are filed under penalty of perjury
we also did telephone interviews with
these families
and
more than half
of the people we interviewed at some point or
another
in the conversation would start to cry
about
what happened to their lives
these are people
who’ve worked hard who played by the rules they got
decent educations
they got married they had kids
they bought homes
they made their big financial commitments
try to educate their children to try to keep
their children safe to try to keep their children
in decent neighborhoods these are
families who see themselves
as losing
their already tenuous hold
on the middle class
many of these people are
people on the way down
this happened in the weimar republic
which is not a good sign
before we go to break again
I don’t want them to be
overly concerned I know we were supposed
to have a break
%um
is part of the problem didn’t part of
the problem arise
in part because
feminists who wanted women to get out
to get a fair break and get out into the work
force and at the same pay that
men get you know
it’s not perfect by a long shot yet
but strides are being made and have been made
they never foresaw this
one could even argue that even the care
about the possibility because they were
very concerned with women at long last getting
a decent break in American society
and %uh and %uh
it’s it’s like
the rules of the game changed in the middle the rug
got pulled of from under people
and really the only people as I understand
who are not subject to what I’m talking about
two income families
are those who and I thin a lot of feminists would
fall in to this class
decided that they were going to become lawyers
or doctors
they’re doing very nicely thank you
it’s that the rug has been pulled out from
under the rest of the world
is there any merit in any of that
the feminist movement
very much
had its roots in
opportunity
that women have to have the opportunity to
go into the work force
but feminists
by themselves can’t be blamed for not
seeing what
no one saw either
and that is
most
families
saw and believed
that if he’s at work and bringing in a certain
amount of money and we could add my salary on
top of that
that’s how it is we can afford
the house in the suburbs that’s how it is
that we can keep health insurance for our family
that’s how it is that we can have a safe heart
that we can put those big
bubble car seats in
indeed
there are books not just from the nineteen
seventies but from the two thousands
in which economists and other social commentators
say the family that has both mom and dad in the work
force
is economically diversified
if he loses his job she still has her job if
she loses her job he still has his job
to me that is the heart of the two income trap
when the budget shifted
to take account
of both of those incomes
so that going from needing fifty two paychecks
a year
in order to make their mortgage payments and
health insurance payment
to needing a hundred and four paychecks a year
his and her paychecks in order to make the
mortgage payments and health insurance payment
the family
didn’t get financially safer
the family got riskier
so as prices are shooting up prices for homes
in suburbs for example
what’s happening
is women mothers
were increasingly going back to work
to try to hit the target
to try to find a way to pay that mortgage
and what happened
the prices shot up
more of them went to work the prices shot up
again more of them went to work
and they got caught
in a trap that no one foresaw
least of all the families themselves well you’re quite
right we have to go to a break before
we do I’ll give the audience let me put
it this way a little lesson in economics
the consumer price index calculated
as one hundred as of seventeen ninety
was only a hundred and one in eighteen sixty
just before the beginnings civil
war
it was only about two hundred and forty-five
in nineteen forty five
at the end of world war two
as of two thousand which doesn’t even
include
all the inflation
stood at something lie two thousand and
ninety nine
and that tells a big story about why what
happened to
the two-income family did happen
okay at long last we’re going to a break
we’ll be right back stay with us
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Elizabeth lets just
spend this segment talking
about the deregulation of the bank and
credit card companies
the kinds of interest rates this freed
the companies to charge
why don’t we start off
by talking about %uh deregulation when
it occurred and what it meant
you know we’ve had usury laws
around the world since biblical times
and it just means there’s a cap
on how much
someone can charge
for interest rates
%um
they were there in colonial times there have been
united states laws well through
the twentieth century isn’t there a Christian tradition not
to charge usury well that’s the question
or
what defines usury whether or not the rate
to high is it any interest at all or is it
a more than reasonable
rate of interest
biblical scholars go back and forth about this question
but the point is
we’ve been wrestling
in humankind about the question of how how to
put some constraints
on the one who has the money
and lends it to the one in need
so what happened is in the early nineteen
eighties %uh we had
at almost at the same time within months
of each other
the credit card industry was effectively
deregulated
by the supreme court
and the whole mortgage
lending industry
was deregulated by congress now
what’s interesting about this
it’s the usery camps were effectively erased with
no public policy debates no discussion about
what the real implications would be
may I ask you a question you may not know the answer
and its not directly relevant
but its humanly relevant
wasn’t that the case that was argued by Bob
bork in favor of the credit card industry on the side of the
credit card industry after he was solicitor general
now I don’t know honestly marquette is
the decision in the united states supreme
court that
effectively deregulated so I don’t know if of bork
was involved in it or not again I interrupted you
that’s okay
he shouldn’t have been because it should have been
before Bork was solicitor general but
but I’m trying to think what the years would be
anyway
what happened is they deregulated
so that
credit card companies mortgage lenders could
charge whatever they wanted
a few years go because you may remember in
the early nineteen eighties we have very high
inflation rates
we’re just beginning to deregulated thats
right but that’s right beginning to deregulate
the savings and loans the banks
are becoming a little more competitive
and starting any the early nineties
a new industry is born again
very quietly but it is known as the subprime industry
and that’s the part
of the lending industry
that doesn’t do the old-fashioned kind of lending
that is they look at someone like elizabeth
warren and they say hmm
we think she’ll be able to pay back without
any difficulty and therefore will lend her
whatever’s the interest rate that they think
reflects risk and the possibility of inflation
instead what happened is they said
you know someone from whom we could make really
good money
is not to lend it to elizabeth warren
because she pays back
on time and in full
it’s to lend to her nephew
who doesn’t have an income yet whose a college
student who is
sporadically employed
lets lend to him
and count on the fact
that he’ll make minimum monthly payments
and he may even occasionally skip a payment
and if he’s already built up some debt by the
time he skipped a payment
we can jack up the interest rate on that
and
that
may improve our overall profit picture
you mean they charge a higher interest rate
when they’re charging interest on interest
that’s right well and
a higher interest rate even though you borrowed
the money back at
eight point nine nine percent
it turns out that most credit card
contracts are written today so that the credit
card company
has an unfettered ability to change the interest
rate
so the interest rate may be changed because
interest rates change generally in the country
but it may also be changed because you missed
a payment because you went over limit
because you missed a payment on another
bill
and that changes your credit report
and so they change the interest rate or because
you apply for credit cards somewhere else
and the current company found out that you
applied for another credit card and that changes
your credit score
and so they up
you’re interest rates
what the credit card companies discovered
is that profits to be made
in lending to people
who make minimum monthly payments who
pay pay pay for a while and then skip a payment or they
may fall behind
that’s where
the real profits in the industry are to be
made I’m not a very profitable customer
because I do pay
in full on time
eighty five percent of revenues from credit
card companies come
from interest payments for people making those
low minimum monthly payments
and from fees
indeed companies have figure out what are the fees
fees are everything from your annual fee which
is actually been going down because people
like me
who don’t want to pay it
to the fee if you’re check doesn’t clear
to the fee if you’re
bill arrives one-day late your payment
arrives one day late
on your
if you go to the credit limit on your
card
fees
were about one point seven billion dollars
in nineteen ninety eight that’s what credit
card companies collected
last year
they collected more than
ten billion dollars
Are these the companies elizabeth
just to take one example
I watch the history channel lot which
is a version of history
particularly if you love war and
%um
and a lot of the stuff they do know is quite
good
some of it is reputedly not that
accurate
but in the commercials you
these companies are always to advertising
you know you don’t have to qualify for credit
just call us this that and the other
why are people
%uh you know why people taking them up on
the bluff they’re paying through the nose
well you know it’s both hands
we market debt today
in ways that just
didn’t exist
fifteen years ago think about that
today there’s no one marking savings to speak of
actually I’ve seen one commercial for why
it’s good to invest
to hold off for the future and
you know there’s the schwab’s of the world
who say if you have an investment portfolio
be sure to come to us
but no one’s marketing the notion of set aside
a little of your paycheck
that’s going to help you buy things in the
future is going to help you
have a safer future it’s going to help you provide
for your children or for your retirement
some things just you know
but there are multi
million dollar campaigns
launched in the US week after week
to try to get people
to lay down that credit card
over and over now try to get people
to put a second mortgage
on their home
to try to get people to go by
brand new cars and zero
financing right
over and over and over
we market the market in the most sophisticated
ways possible
take on some debt
you have to look at this the other way too
that’s a part of this story about what’s happened
but the other part of the story is that families
have turned to debt
when the economics of the times
have become far more than they can manage
on their income so for example
many of the families that we interviewed in
bankruptcy as I said two out of three had a
significant job loss
fifty percent of them
had had a serious medical problem and you see
the overlap so that it’s about seventy five
percent have had
either a medical or a job problem
and throw in divorce in were up to ninety percent
of the families to file for bankruptcy
that’s often
when families turn
to credit cards
um
doctors now emergency rooms
if you don’t have
health insurance
lay down that credit card middle class families
don’t have Medicaid
what do they have
they have master card and visa is that what you mean when you
talk about extensively I must say
about the lack of a safety net because
people are quote mortgaged up to the
hilt
that it takes every nickel of their
two incomes and if they have one disaster
medical job
everybody’s got these disasters that’s right
o boy they are
SOL is not something to be said on
television but that’s what it is
that is the problem
and that is how much of the middle class
is living
just one misstep
away from complete collapse
I’ve talked to families since this book has coming
out
who will say to me professor warren
we’re living the life you described
in the two income trap
if I lost my job
if my husband got sick
for an extended period of time if one of our
children had
a really serious health diagnosis and one
of us needed to stay home
with her
we’d lose our house
within three months
we would have lost
everything that keeps us in the middle class our
house our car our health insurance would be gone
you said to me
before the next break I want to get to two questions first
you said to me that city citicorp just announced
it’s coming out a credit card
that has
a forty one percent interest rate
fourteen one percent interest rate
how do they do that they do it
by financing people who are already in financial
trouble
so they say fine you’ve got this credit
card
if you’ve missed a payment
your going to be upforty one percent or are they
saying
we’re glad to offer you
some more money even though you are already
skipping payments missing payments you’ve
lost your job you’ve been in the hospital
because your sick but
down in the fine print but let’s face it
they did not put on the front of the envelope
inside a credit card for forty one percent
interest its that
it’s that the experts at reading the card have
figured out
that this is a forty one percent interest
this is loan sharking
it used to be
back when it was illegal
but you have to understand
today
citibank and MBNA the
second biggest credit card issuer
are hailed on Wall street
for doing things that would have landed their
CEO in jail
just twenty five years ago
that’s how quickly we’ve changed
another way to emphasize this is to tell you the
story we tell the story in the book about
jamal can I tell you that story briefly
this is a fellow who works for
a major company
he had health insurance and he had a massive
coronary
he thought he would be protected his wife’s at
work they have three children they’ve committed
all of their income to their mortgage their
car payments to their health insurance
so he has this massive heart attack
the insurance company is going to take care of the
medical bills but what happens
he can’t work
for more than three months
they do everything they can to try to stay
current with their payments
but the inevitable happens
they miss a mortgage payment
and now it’s bearing down on the second mortgage
payment
and the day comes when the phone rings
and jamal said I knew that call was coming
who was on the phone it was the mortgage company
and the first words are we see that you
are now late on your
second mortgage payment here
and he said he closed his eyes and is waiting
to hear
how they were going to threaten him how they were
going to insist that he pay how they were going to
add additional charges
but what was the next sentence
We think you may be in some financial difficulties
so we’d like to help you out
by refinancing your mortgage
we’ll offer you some cash
we’ll put just a little larger mortgage
on your house
and you pay us back when you can
now jamals no dummy
he kept asking questions about it and figured
out that what they’re really talking about
doing was more than doubling the interest
rate
on his house
and that if he couldn’t make the mortgage payment
right now he sure as heck have couldn’t make the mortgage
payments once they double it
that’s the problem
genetic tests other great threat that’s exactly
right
they’re going to take the house and sell it at great profit
they’re going to make money if he pays
and they’re going to make money if he doesn’t pay
and that’s become the heart of the industry
and the difference is jamal and his family
will be on the street
and that’s what happened
with the credit industry it has divided
I’m getting a great mortgage at a low interest
rate
but I have lifetime tenure
I can make my payments on time
the world that lives with job loss and with
medical problems that they can’t pay for who end
divorced
those families
are ending up in a very different credit world but let me
ask you something thats
one of the reasons that the
vox populi the people at large
don’t have much sympathy for academics
who have tenure but
let me ask you a question we’ll delay the break
until your
finished
%um
a major point in the book as I said before and
we didn’t really elaborate it
is that people are undertaking mortgages that
are far too large
because that is necessary in order
to get into a good school district
and it’s one of the places where there’s been
the maximum
%uh the most inflation
but do people really have to buy houses
is quite as big as the houses their buying
wouldn’t it be possible
to buy less expensive smaller or older houses
in some of
these areas and undertake therefor
a lesser mortgage
you know this is a variation
on the overconsumption myth its sort of the overconsumption
myth housing division
and
people see the new houses springing up in
the suburbs and they see that the square footage
is up they see that they have spa bathrooms
and granite counter tops
that’s fine
that’s what’s happening at the top end let’s
talk about
where the median
earning family is living in the united states
today
the family earning at the median
has increased its housing size
it’s gone from five point seven rooms
to six point one rooms
and what the federal data show is that on average
that either means they’ve picked up a second
bathroom
or a third bedroom
so
we’re not talking about families who are living
in huge housing indeed todays
median earning family
is more than twice as likely to be living
in a house that’s more than twenty five years
old
than their families were a generation ago so they are moving
in to older housing
they’re moving into modestly sized housing
but here comes the hooker
of what’s happened to the prices of the
houses they’re living in
today’s median earning family living in
that median family house
it’s more than four times more likely to be
house poor
that is
dedicating more than thirty five percent of
their income to just making the mortgage payment
then they were a generation ago
what’s happened in the united states
is that families with children
believe
that the number of places
where they can buy homes and still send their
children to public schools
is shrinking
and some families arm bidding up prices in
places with decent school districts
and the consequence is
their mortgage
as a proportion of their total income is reaching
way out of proportion
at a time
when the average males wages
have not increased by a full one percent
thus the amount
that the family spending on mortgages
has gone up sixty nine percent
you know there was a story in the times just
this week or last week about families who
bought
in the poconos and live in new york city
I was interviewed for this story I talked to these
people well it was a textbook example of
what you’re talking about they’d sell them at
prices that were too high
they end up losing their houses
any you know
this is
the consequence of losing a
house is more than just financial
the children lose their schools
the family
loses
a lot of their self identity and a lot of their hold
on the middle class
we’re watching
middle-class families
who are being pushed out of their homes
who are being foreclosed against who are selling
under duress it turns out to be the same thing
they’re moving back in with mom and dad so
we end up with three generations in
modestly sized housing
they’re moving into apartments
and much rougher
neighborhoods
families
are losing their hold
on their place in the middle class and more
critically for the families
they’re losing what they see as the opportunity
for their children
to get the kind of education they’re going
to need
to make it into the middle class themselves
Our producers are really having
a nervous breakdown because they don’t call
a break here so
i’ll call a break
we’ll be back in just a moment stay with us
again for the final segment
of this particular program
hello my name is Anne Hemingway
I earned my juris doctorate degree from the Massachusetts
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thank you and I hope to see you in class
the prosecution
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welcome back
elizabeth I presume that the mortgage and
credit card and banking industries would say
something like the following
that %uh you and your daughter have focused
on what might be called the pathology
the down side
of easier credit
that in general
the easing of credit that occurred from nineteen
eighty onward
has benefited the country immensly by making
credit and therefore a better economic life
available to people who
never could get it before
you know the old story banks will loan all you
need when you don’t need the money
all you want but
when you don’t need the money but god forbid you
should need the money you cant get one red cent
from a bank that goes back to the days before
the easing of credit
and they’ll say that that were we to %uh re-regulate
credit as you suggest
there would be a lot of hardship on people
who once again would be relegated to not
being able to get credit as women couldn’t
as minorities couldn’t in the old days
and %uh values in the economy %uh will
go down dramatically and really we’ll be facing
economic disaster
what’s your response to that
I’ve heard them make this argument you’re exactly
right this is the standard argument from the
credit industry year all better off
for
our
lending all this money and ] making these
profits off middle class families
who are having trouble repaying
so lets start with the home mortgage industry
this is the classic right if we hadn’t leant you so
much money you wouldn’t be out there buying houses
the subprime mortgage industry
that is
the one thats charging
fifteen percent for these mortgages instead
of six percent for these mortgages
that was
city financial the
subprime arm of citibank
was charging an average of about fifteen
and and a half percent on its mortgages at a
time when mortgage rates were around six percent
where do most of those mortgages go do to they
go to help
poorer families or or or less well-off families
get into homes in the first instance no
more than eighty percent of subprime mortgages
are refinances
they’re financing people out
of their six percent mortgages and financing
them into
their fifteen and a half percent mortgages
why are people doing that
why don’t we ask
city financial
in the book
we talk about what happens when citi financial
got sued for some of its motgage practices
and one of its loan officers gave a deposition
now remember thats a sworn deposition
and he was asked exactly this question
how did you charge people so much at a time
when interest rates were so low
his response I’ll have to paraphrase
but the exact words are in the book
well
when we talked to somebody because these were
usually over the phone
and they sounded like
they were old
or young and unsophisticated or a minority
we just loaded on
all the fees and charges that we have
and they usually would go ahead
in other words they counted
on the fact
that there’s a lack of sophistication about
mortgage products among many folks
and that they would not reveal
true costs can I summarize what I think
you’re saying
you’re saying that their argument is false
because it is not creating a stronger economy
they’re taking advantage of people who don’t
know better
indeed
today’s subprime
mortgages
one in every eleven
in the united states today
is in default and foreclosure
they’re not helping people get into homes
they’re helping people get out of homes this
is the lose your home business not the get your home business
how about the credit card industry thats
making money available to people lets talk about the credit
card industry
last year alone do you know how much
people paid
interest
and fees on credit cards
ninety
billion dollars
in the united states and who do you think paid
I don’t pay it
it wasn’t paid in the top twenty percent it
wasn’t paid by the bottom twenty percent
this is ninety billion dollars that was
drained out of the pockets of the middle
income families
yeah but money alone amount
alone
doesn’t say much it’s a question of percentages
isn’t it
well percentage of whaqt
families are now carrying twelve percent
of their annual income
in credit card and other short-term debt
families
are going broke under this load of debt
let’s look at the big picture the
credit card companies want to look at the big picture than
lets back is all the way up
what exactly is the long term
interest here
if families have spent
next week’s income and next month’s
income and goodness we’re at the point now
next years income
what exactly is going to happen to the economy
we only have two options here
either there’s going to be an extended period
where consumers now have to under consume
to pay that debt back right you don’t spend
this year’s salary you have to spend
twenty percent less than this years salary to
pay off that old debt
or there’s going to be massive default
in the united states a day of reckoning will
come the day of reckoning will come the idea
that we have a strong economy
because we have pumped up consumer debt is
just false
it’s worse a bubble in this case
this is one for which
we must either pay back or have massive
default on the other end
we have only about two minutes left
and there for
I shall as is my want rudely interrupt
and ask you to tell a story because
I think it’s indicative of the kinds of problems
we face in trying to remedy this
tell the story about
your relationships with Hillary Clinton
I wrote an op-ed
in the late nineteen ninety’s that
ended up in the new York times talking about
the then pending bankruptcy legislation
credit card companies were pushing for a bill
to make it harder for families to go into
bankruptcy and get rid of credit card debt
very straightforward piece of special interest
legislation
I pointed out through the data some of
the data that is in this book
that would fall disproportionately hard on
women with children
misses Clinton evidently saw the op-ed
placed a phone call her office
called and said she’s going to be in boston
would you be willing to meet with her
I said sure
I went down to the hotel where she was giving
on speech when she was through with her speech
we were ushered off into a tiny room
and %uh had our little lunch hamburgers
and French fries
and I had my charts graphs and I started in they had
tea for you and a hamburger for her that that’s right
misses Clinton
looked at the charts and graphs I start talking
through here’s how the bankruptcy system works
heres how consumer credit works heres how pieces
go
here’s how the bill
would change
the following pieces
I gotta tell you missus Clinton got it
she’s the smartest student I’ve ever dealt with
twenty minutes into this conversation she
could finish the sentence that she can predict
what the data would show
she could see how the pieces get together
and she said at the end of our conversation
we were together about half an hour she stood up and she said
professor warren I’m going to count on you
to help me stop this awful bill
and we had our picture taken she goes back to
Washington now I learned from a white house
staffer
a little bit later that
President Clinton
had been
quietly supporting the bankruptcy bill it was one of
those economic issues that would show that
the new democrats could play ball with
banking interests
and besides which its under the radar screen it doesn’t make the front
page of today’s we only have thirty seconds
I want you to get to your
ultimate point
misses Clinton
got the white house reversed on this
one of the last things her husband did
was veto the bankruptcy bill and in in her
autobiography
she takes credit
for getting the bankruptcy bill vetoed
misses Clinton then gets elected
to the senate and one of the
first bills that comes up in the senate is the bill
the same bill
that her husband had vetoed
misses Clinton as Senator Clinton
rather than as first lady
turned around and voted in favor of it she got a hundred
forty thousand bucks from the industry
its more than just money it’s the pressure the industry
bares
in making campaign contributions in lobbying in
organizing its constituency
in the area of consumer finance
it is not a level playing field
all the money is on the side of banks we have
to wrap this up what it comes down to right
is we have a liberal hero who was bought off
we have a liberal hero who was pressured
and pressured by an industry
that understands
that getting its weight in Washington
will improve its bottom line
we have to wrap
our people have had an actual nervous breakdown
that they’re on the floor
thank you very much for being here
its a pleasure to be here.