Priced out of the American Dream

Americans are increasingly tied down by debt -- that's nothing new. But Harvard professor Elizabeth Warren says the rising costs of bare necessities, not luxuries, might change the very nature of America.

Harvard professor Elizabeth Warren says that contrary to leading opinion, the growing consumer economy is not the source of America's growing debt crisis -- it's the ever-rising cost of big-ticket items like mortgages, insurance, cars and other "necessities" of modern life.

Elizabeth Warren, a portrait in soft-spoken calm as she sips tea in her gracious office at Harvard Law School, is sounding an alarm.

"The American middle class is in real trouble," she says, her Southern-tinged sotto voice belying the power of her statement. "American families are smack up against the wall, financially speaking." A middle-class lifestyle, she says, is increasingly out of reach for middle-class families, many of whom are going broke trying to attain it.

In the past five years, if you called a mortgage broker when you were about to buy or refinance a house you may have been told, "We can check with lots of lenders so you'll get the best price." Because you are a careful shopper, this sounds good - one-stop comparative shopping. The broker most likely didn't add, "I'll take a bribe to steer you to the loan that is more expensive for you and more profitable for the lender."

A mortgage broker can offer wise advice to guide a buyer through a dangerous thicket of complex mortgage deals, but you are just as likely to encounter a broker who is working only for himself. There are brokers who take what amounts to a bribe from a mortgage company to steer a client into a higher-priced mortgage than it could qualify for, all the while assuring the client that this is the best possible deal.

In late January, Senator Chris Dodd held hearings on credit card practices,, sternly warning credit card companies to clean up their practices or face new legal restrictions. Nearly every senator on the banking committee chimed in with the same message.

Today, Citigroup dropped two of the most criticized features: universal default and anytime interest rate changes. No new legislation, but millions of customers will get a better deal.

The Citigroup shift is an important reminder of the power of the Congressional hearing. So long as the folks in charge of Congress didn't want to upset the credit cardcompanies, the companies kept on adding new tricks and traps. But now direction has changed.

Illness and Medical Bills Cause Half of All Bankruptcies. 2 Million Americans Financially Ruined Each Year. Harvard Study Finds 2200% Increase Since 1981. Most of Those Bankrupted by Illness Were Middle Class and Had Insurance.

Professor Warren, a leading expert on personal bankruptcy, went on: "Bankruptcy costs these families substantial assets and deep personal shame.

A person may recover physically from a medical problem, but millions of Americans will never recover financially from their encounters with the health care system.

While middle-class families generally need two incomes to make ends meet, it's reliance on that second income (usually Mom's) that's putting them in financial peril. By counting on two incomes to fund the basics of a middle-class lifestyle - including modest homes in safe neighborhoods with good schools and high-quality child care, preschool, after-school care, or college - families have forfeited their safety nets.
"When a family builds its budget around two workers ... they're much more exposed to any economic disruption," says Warren. A generation ago, if the sole breadwinner lost his (or her) job or became disabled, the family had a backup earner who could step into the workforce. Further, reliance on two incomes makes families twice as vulnerable to layoffs.

"The two-income family is like a speeding race car," says Warren. "It goes faster than its one-income counterpart, but if it hits a rock, it careens out of control and crashes."

We've built this latest economic boom on borrowed money. Consumers, to the extent that they've stayed afloat, have managed to stay afloat by using their credit cards and by taking out home-equity lines of credit.

Americans are in a lot of debt not because they're over consuming, but because of big fixed expenses that they really can't wiggle out of.

Where American families are getting ruined financially is in the areas of mortgages and health insurance. The fact that they've got to have two cars, the fact that they've got to put their children in child care, their taxes -- the things over which they have little or no control.

What families are spending on clothing in the last 30 years, it's down 33 percent in inflation-adjusted dollars. What they spend on food is down about 20 percent. What they spend on appliances, down about 52 percent. It's not stuff that's driving families to the poorhouse.

I worry that there are gonna be some people that are going to delay marrying, there are going to be some who are not gonna have children, that the family life that sustains America, that makes us who we are, will become so expensive that many Americans will just opt out. And if that happens, everything that we understood about America starts to fade away.

The typical family is carrying now about two months' worth of income in credit card debt. So what's going to happen long-term? Do we have a period where all these families that are carrying all this debt simply cut back on their consumption so that they can pay off the outstanding debt loads? Is that gonna be a long, slow decline, or is it going to be a one-time smack? Either way, the consequences for the economy cannot be good.