For those of you who disregard consumer protection issues and the TARP bailout, Elizabeth Warren is, I believe, the foremost voice in consumer protection today. She first hit my radar screen many years ago when I snagged a copy of “The Two Income Trap” at the library. Since then I’ve noticed her on “Frontline” and “The Daily Show with Jon Stewart”, among other places. Just the other day, she lectured at the Clinton School for Public Service.
The core of her lecture was a discussion of the decline of the middle class and the concurrent disassembly of consumer protections. In summary:
- There was a significant household income shift from the 1970’s to today. In order to maintain or increase average household income, the household sent a second member into the workforce. Before the 1970’s, the traditional household had one member in the workforce (usually the male) and a second member, if at all, at home. Now, in the average household, both members work. Not only do both members work, but expenses have increased such that both members are, on average, required to work. This income composition shift has subjected households to increased financial risk and expense. First, risk increases because (with two earners) the likelihood of layoff or other income/work disruption increases. Secondly, without a person at home to care for family and relatives, there is an increase in the expenses associated with such care. Some examples would be daycare or caring for sick and injured relatives.
- Savings decreases and debt increases corroded the resilience of the household’s finances to withstand financial shocks. Since the 1980’s, there has been a near steady trend to increase household debt. In the last year or so, there has been a sharp reduction in household debt, but this is recognized to be due to debt written off as uncollectable by creditors. It’s not due to people paying off their debts. Additionally, Ms. Warren showed evidence that savings has been drastically decreasing, except, again, for the last year or two. Savings spikes in recessions, but there is no reason to suggest that it won’t drop back to normal low levels as the recession ends. Finally, Ms. Warren demonstrated that mortgages as a percent of home value has increased steadily since the 1980’s. What this means is that the average household has less savings and more debt than before the 1980’s.
- Ms. Warren attributed these two negative trends to the de-fanging of usury laws in the 1980’s, which allowed creditors to charge tremendous interest rates. She likened usury laws importance in consumer protection laws to as to a tent pole and the surrounding stakes.
Ms. Warren also shared her vision for the new Consumer Financial Protection Bureau:
Markets That Work
- Prices for financial products should be clear.
- Risks of a financial product should be easy to see.
- Fine print that doesn’t hide terms.
- Costumers should be able to compare three to four mortgages
Seriously, who can complain about that? Aside from predatory lenders, of course.