Originally aired: June 25, 2004
BRANCACCIO: Next Wednesday, June 30th is also a landmark day for the US economy. With all the headlines that pour in from Iraq that day, watch carefully and don't miss the expected bulletin from the guardians of interest rates at the US Federal Reserve who are expected to raise rates for the first time in four years.
This week, the man who will shepherd that decision, Alan Greenspan, was sworn in for his fifth term as chairman of the Fed. It was a low-key affair: the deed was done in a house in Colorado. Okay, it was former President Ford's house. Current Vice President Dick Cheney was in attendance. And that's Greenspan's wife, NBC correspondent Andrea Mitchell. She held the Bible.
But for a guy whose power rivals the President's when it comes to matters of the pocketbook in America, you'd expect a little more, I dunno, fanfare.
The hike in interest rates should be the first of many, aimed at keeping at bay something we haven't seen for a while, at least until this year… inflation. Under these new conditions, lots will change including the price of a mortgage.
New figures show sales of new homes surged to record highs in May, ahead of the rate hike, which could change that trend. This makes the time ripe for a conversation with Elizabeth Warren. She is a leading expert on bankruptcy and middle class debt. She teaches at Harvard and has co-authored 3 books. Her latest is .
We began with topic A: Chairman Greenspan.
BRANCACCIO: Fed chairman, a new fifth term. I guess he's looking out for the American people. He's run this economy quite effectively over these many, many years.
WARREN: Well, I think we need to be clear about who Alan Greenspan's constituency is. You know, he talks a lot about the economy, but he also talks about families. And when he talks about families, Alan Greenspan, for all of his sober demeanor, writes happy-face speeches about families.
He says, "They're doing great, they're doing great, they're doing great." But, you know, if you do a word search on those speeches, they're really kind of amazing. There are all sorts of words that never appear in them.
Words like "childcare," and "health insurance," and "affordability of mortgages." Instead, what Alan Greenspan focuses on when he talks about the health of the American family is whether or not they'll be able to continue to make the payments on those outstanding credit cards, and outstanding loans. Because if they can keep making the payments, if they can keep a shoulder to the wheel, then it means the banks are safe. Ultimately, Alan Greenspan's constituency is just the banks. Just keep those banks safe, and that means everything is happy.
BRANCACCIO: But you see, Chairman Greenspan does think we can make the payments by and large. He's been asked about this at recent appearances. And he's not that worried about household debt, or that it's too much, or that we might be getting in over our heads.
WARREN: You know, I don't understand what Chairman Greenspan is reading in terms of the data. Let's talk about what's happened to families, not in the long past, just since the year 2000. Since the year 2000, credit card defaults, that is people who are not making even the minimum monthly payment, up 55 percent.
Home mortgage foreclosures — people who desperately want to keep up the payments on that one asset, because if you don't, it means you're out on the street — up 45 percent. And bankruptcies, the ultimate declaration of financial death that I can't make it anymore, up 33 percent.
What was the number one New Year's resolution this year?
BRANCACCIO: What was it?
WARREN: For the first time ever, overtaking "Lose weight," it was "Pay off some debt. I've got too much debt. I'm in trouble. I'm worried whether or not I can make my basic payments."
Alan Greenspan, our national economic leader, has stood up for the last four years and told Americans, "Borrow against your house. If you can't close the gap at the end of the month, just borrow against your house." Now, he never called it borrow against your house.
He said fancy things like, "Tap your home equity." Which sounds like some kind of dance, or, you know, some clever financial thing to do. But what it really was is borrow more money against your house.
And bet your house that you can continue to make all those payments. Do all that just as a way to make it to the end of the month. To put groceries on the table. To make that house payment. To keep the lights on.
That's really scary financial advice for someone to be giving American families. And what frightens me is millions of American families have taken that advice.
BRANCACCIO: Why is it so bad, though, to take out a second mortgage, home equity loan? I'm from northern New England, from very prudent stock. A lot of skepticism about debt from the tradition that I come from. But, you know, the houses around me are rising in price. And it makes sense that I should be able to harness some of that rising real estate value. And, get access to the capital.
WARREN: Hey, New England has no corner on the market on prudence. I'm from Oklahoma, and we are every bit as prudent as you New England types. But think about what happens when you load up more debt on your house.
Just you are rolling the dice at the table in Las Vegas. And here's how you're rolling it. You're rolling it that your income's going to continue to go up. That nothing serious is going to go wrong in your family that's going to make it hard to make those payments.
Someone's going to get sick, you're going to lose a job, you're going to be without health insurance. Someone's going to get divorced. None of those things are going to happen to you. And here comes the third one, the one you hit on.
Home values are going to continue to rise. Does anyone have any memory? We know that home values fell just 20 years ago. They eventually recovered, right? But there are periods when they go down.
Let's talk about Ronald Reagan's presidency, that's been in the news recently. Do you remember what was happening? The home values in the early 80's? When interest rates go up, home values go down.
And then here comes the real hooker. And when mortgage foreclosures start in earnest, it doesn't just affect the person who's been foreclosed against, it affects everybody up and down the block.
When banks take homes away in foreclosure, housing prices for the entire neighborhood drop.
BRANCACCIO: I want to stay on the subject of house prices for just a moment. In a way it's a real window into the health of the American family, to get a sense of their relationship to their mortgage, their relationship to their own house.
The big news now is that interest rates are going up in a couple of days. It's not going to be much right? I mean quarter-percent next week. Maybe by the end of the year, three-quarters of a percent.
I got online, did the math. If you have adjustable rate mortgage that's three and a half percent now, and it goes up three-quarters of a percent, you're only going to be paying $64 more a month. Are we overstating the effect of rising interest rates? They're at 46 year lows right now, what do we expect?
WARREN: What's happened in this last big wave of re-financings, and purchases, is that an increasing number of families have moved over to adjustable rate mortgages. And, the reason has been that that was the only way that they could qualify for the mortgage at all. That is, it's only when the payment is pegged at its lowest possible point that they can afford to pay.
BRANCACCIO: So they're right at the edge of being able to buy the house.
WARREN: That's right. So, you have to remember, adjustable rate mortgages, sure, they're spread throughout the economy. There are rich people with them, and poor people with them, and people in the middle with them. But they are concentrated in the hands of people who don't have the $64. Those are the people who disproportionately today have adjustable rate mortgages.
BRANCACCIO: I'm always struck though by just how much of a mortgage Americans seem to be able to buy. I've seen statistics. We figured out, somehow, how to buy these expensive houses. Maybe we'll continue to innovate in order to avoid the crisis that you see.
WARREN: Well, you know, what a mortgage company will lend you to buy a house, and what you can afford, are two very different numbers.
BRANCACCIO: They're not looking out for me when I'm trying to make that decision?
WARREN: What they're looking out for is to make a profit. God bless them. That's what they're there to do. They want to make a profit. And the way they make the best possible profit is to put you in the largest possible mortgage that you, by scraping and scratching, can make just a few payments.
And then they pass that mortgage off to someone else. Put it into a risk pool and move on. They're off selling the mortgage to the next guy. You know, always before mortgage brokers had to take a hard look at whether or not you were going to be able to make those payments in good times and in bad.
They wanted to see that 20 percent down payment. Indeed, in 1980, you know what the median first-time buyer down payment was in the United States? 18 percent. That's what people put down when they bought a house. So they were financing about 82 percent.
BRANCACCIO: Well, I'm making the face, because nobody puts down 18 percent anymore.
WARREN: Today, the median is less than three percent.
BRANCACCIO: The median, the typical…
WARREN: Half of the people in the United States, when they buy their first home, are putting down less than three percent of the house value when they buy. Now think how much equity that leaves you with. Right? That doesn't leave you with enough equity to pay the real estate agent's fee if you end up having to sell it if you can't pay for it.
BRANCACCIO: But it gets people into the house.
WARREN: Oh, it absolutely gets them into the house. The question's going to be, can they stay in the house when they get into financial trouble? Let's keep in mind, let's go back to an important number. And that is home mortgage foreclosures.
Since the year 2000, we have seen a 45 percent increase in the number of people who just can't stay in their homes.
BRANCACCIO: But, you know, Elizabeth, our man Alan Greenspan, when asked in public about, "Are you worried about debt load?" He said, not so worried because financial services industry has come up with innovative approaches that ameliorate the effect of a down turn.
WARREN: But look at what his innovative approaches are about. They're about owing money for an additional ten years, an additional 20 years, an additional 30 years. They're about people losing what is the number one retirement plan in America.
You know, we have to stop and remember. 50 percent of all Americans don't have a single dollar of retirement savings put aside. Through their company, or themselves privately. What is the number one retirement plan in America? My brother's retirement plan. You get your house paid off, and you count on living in it for the rest of your days. And if something goes wrong, you know that you've got an asset that you'd be able to sell.
BRANCACCIO: Yeah, or you do sell it and buy something smaller.
WARREN: Or you do sell it and buy something smaller. That is America's retirement plan. Alan Greenspan has talked Americans out of their number one retirement plan.
And we're starting to see the effect of that. We're starting to watch the numbers grow of people who are 65 and don't have their homes paid off. People who are 55 and still owe 20, 25 years on their mortgages.
Or in 30 years when you're just finishing mortgage payments, 15 years after you've tried to retire. Trying to manage mortgage payments at the same time you're trying to live on social security. We've, literally, as a country, mortgaged our future.
BRANCACCIO: We better then pray that wages are going up, to help meet these demands. The statistics show that wages are going up a little bit since the beginning of this year, something that the President can boast about.
WARREN: Well, the long-term trends don't look good. If we go back 30 years, fully-employed male's wages adjusted for inflation have moved off their starting mark by less than one percent.
BRANCACCIO: Over how long?
WARREN: Over 30 years. They've basically stayed the same for a fully employed male. Now, women's wages have gone up, because women have gotten their educations and… right, there's been a real change in the workforce.
But for men, adjusted for inflation, it has stayed effectively flat. For families since 2000, it's actually gone down about 2.8 percent. There's just been a slight decline for families.
BRANCACCIO: The effects of the recession?
WARREN: The effects of the recession.
And I think what the landscape shows is the middle class is under assault in a way that has not happened before in our history. Stagnant wages, rising costs, wildly rising debt. It's in everyone's interest to turn that back around.
And the ways we turn that back around is partly we share some of that wealth with folks in the middle. With the folks who work. And partly we bring our debt industry back under some control. It's been effectively deregulated now since the early 1980's. It's never had the opportunity in our history to get out there and make the kinds of loans and sell the kinds of loans that it's been selling for nearly 25 years.
And we're starting to see the costs associated with an industry run wild. The time is upon us to think about a little more regulation again. And to think a little more about the workers and the employers being engaged in the same enterprise. I don't think that's so crazy. I think that's where we've got to go if we really believe in the heart of America.
BRANCACCIO: Elizabeth Warren, Harvard University. Thank you very much.
WARREN: My pleasure.