Chatper Six: The Cement Life Raft

The chapter begins with a personal anecdote from Elizabeth Warren's life. In 1998, Elizabeth was called to the White House to meet with then First Lady Hillary Clinton about a scathing editorial Elizabeth had written denouncing a bill aimed at undercutting bankruptcy protections for the middle class. After thirty minutes with the First Lady at lunch, Elizabeth had explained the entire bankruptcy system and what the current proposed law would do to it. By the time she finished, Mrs. Clinton was convinced that the bankruptcy bill would do more harm that good. The First Lady managed to get the entire Clinton administration to revoke their support for the bill and her husband vetoed the bill when it crossed his desk a few months later. However, a year later the bill was re-introduced under the Bush Congress and this time, Hillary voted in favor of the bill.

The authors now begin to explore how the unregulated lending industry has affected the average middle-class family. Obviously, the amount of debt the average middle class family is in has increased substantially over the last decade. The authors attribute this increase in debt to the deregulation of the lending industry. Twenty years ago, families did not have as much debt because they could not get as much. Since the lending industry was limited as to how much interest they could charge, they only loaned money to people they were sure could pay it back. Nowadays, banks can "export" interest rates from states with high interest caps to states with low interest caps. States would raise their interest caps to attract business, and suddenly banks and credit card companies were essentially unlimited as to how much interest they could charge. These higher profit margins allow banks to lend to everyone--even people who will not be able to pay them back.

Statistics show that Americans are bombarded daily with numerous offers to get more debt. Most Americans do not use this debt on frivolous "stuff." They use it to try to get ahead in the two-income trap bidding war. They use it to pay for groceries while Dad is out of a job or to cover health costs until something changes. It is certainly true that all of this credit card debt causes more people to go bankrupt--a third of bankruptcy filers owe more than an entire year's salary in credit card debt. The authors argue that although these families did try to live beyond their means, it was only because they did not see the unexpected tragedy in their futures or wanted a better life for their children.

The authors also blame high mortgage rates on the deregulation of the lending industry. Banks allow families who cannot afford houses to purchase mortgages they cannot pay back. Before deregulation, banks would not allow home buyers to purchase a home if they could not put down a 20% down payment; now, banks could care less. The people who cannot make a down payment are the people the banks charge the highest interest to. If banks foreclose on the home, they can then sell the home at auction for an even larger profit. Finally, banks have come up with the idea of a "subprime" loan, a loan with 10% more interest that is offered to families with poor credit scores. They claim that these subprime homes increase the number of homeowners, but the facts simply do not support this claim. In fact, it is possible subprime loans lower the number of homeowners because they increase foreclosures so much. Finally, these subprime loans are often paid by people who would have qualified for the much cheaper conventional mortgage. These people, often minorities targeted by banks, are often unaware of their options and get sucked into the much more profitable (for the bank) subprime loans.

Most people nowadays believe that debt has increased because people simply do not work as hard or have the same values as they once did. These authors propose that the real increase in debt is because the lending industry itself has changed. Most credit card companies actually target those who fall behind on their loans because that is the group from which companies receive the highest profits. Elizabeth backs this up by telling the story of the time she went to advise Citibank (the largest credit card issuer) on how to increase its profits. She suggested that they stop loaning to people who are already in financial trouble. The highest ranking executive told her flat-out that her idea was unacceptable because those are the people from whom they receive the highest profit margins. In short, debt has increased because companies target the people least likely to be able to pay them back and then charge them exorbitant interest they cannot afford on top of repaying the company. Companies make people pay by constantly calling them and (falsely) promising the send the "repo man" after them. Companies often threaten measures they are not even allowed to take to force people to pay up (like going after families of the deceased who do not owe the dead person's debts but often end up paying it anyways).

The authors suggest that the way to fix the entire problem would be for Congress to pass a bill either creating a federal interest limit or forbid states from overriding one another's interest rates. Congress even could tie the interest cap to the inflation rate to prevent a bank crash like the one of the late 1970's. It would not cost taxpayers anything and all the changes the lending industry has undergone in the last thirty years would slowly reverse themselves. Right now, the credit industry is uneven because not all people have the same access to credit information. Re-regulation the lending industry would give all people the chance to be safe even if they did not understand the concept, much like how the federal government currently regulates consumer products from toys to cars for safety reasons. Re-regulating the lending industry would cause foreclosures, credit card debt, and house prices to decrease, prevent money from shifting away from middle class families to credit card executives, and eliminate lending abuse. Some might argue that regulation would decrease the amount of families who could access credit. The authors point out that since the original idea of allowing more families access to credit was to increase these families financial opportunities and the deregulation of the lending industry has actually decrease financial opportunity and security, it only makes sense to regulate the industry once more. Lawmakers will never be able to keep with lending abuse practices on a case by case basis. It is time to eliminate the chance for lending companies to abuse borrowers once and for all.

The authors finally return to the bill with which the chapter opened: the bill to change bankruptcy regulations. Originally, Congress created a commission to explore why so many more people were going bankrupt. The Committee (which Elizabeth advised) gave the same reasons as this book for the increase in bankruptcy and suggested that the bankruptcy laws be kept the same. However, the banking industry lobby pushed for Congress to reduce the number of bankruptcies by making it harder for consumers to file for it. This would of course help the lending industry immensely--now they could decide when to let customers off the hook for debt, even if the day never came. The bankruptcy bill proposed would increase profits for the entire lending industry and the lending industry poured millions into political donations to get it passed. They tried to get the American people behind the bill by claiming that it would save Americans $550 a year in bankruptcy taxes, something that could never realistically happen.

The true twist in the story is how this "awful bill" was stopped. It was actually stopped by women who were pro-life. Pro-choice groups often sue pro-life protestors and win thousands of dollars in reparations. The sued then declare bankruptcy and have the fine nullified. Pro-life women organized to keep the option for these people to declare bankruptcy alive, so that protestors would not have to pay hundreds of thousands just for protesting what they believed was morally unjust. The bill became a battle between pro-life and pro-choice groups, and the pro-life groups built up enough momentum to kill the bill.

The authors include this as an example of what would happen if all the groups harmed by the deregulation of the lending industry banded together to demand change. If predatory lending became the number one issue for hispanics, African Americans, women, and other groups, they would see the same amount of progress they currently see in battling discrimination. If all groups band together like some current faith groups (Jews, Catholics, Unitarians) to battle predatory lending, eventually they will succeed in eliminating the two-income trap.