The Two-Income Trap - Elizabeth Warren [67]
No advertisements trumpet, “When your husband leaves you, there’s MasterCard.” Nor do we hear: “American Express: Don’t lose your job without it.” But those slogans would be closer to the truth about how credit is used today. When corporate layoffs loom, workers apply for as many credit cards as possible to see them through until they can find a new job.22 When health insurance lapses, the family hands a MasterCard to the doctor and prays for the best.23 And when Dad walks out, that “E-Z check” stuffed in with the latest credit card bill looks like just the thing to tide Mom over until the child support checks arrive. Later, when the credit card payments become unmanageable, the family takes on a second mortgage to consolidate all that debt. No one would suspect it from looking at the ads, but for every family taking out a second mortgage to pay for a vacation, there are sixty-one more families taking on a second mortgage so they can pay down their credit card bills and medical debts.24
The bankruptcy court offers a peek at those in the most trouble with debt. The Myth of the Immoral Debtor would have us believe that these families consumed their way into bankruptcy, running up their credit cards to cover their “reckless spending.”25 They are at least half right; families in bankruptcy are choking on credit card debt. Ninety-one percent of the families in bankruptcy were carrying balances on their cards by the time they filed. A third of homeowners were carrying second or even third mortgages or had refinanced their mortgages to get some cash.26 The amount of debt was truly staggering. Nearly one-third of bankruptcy filers—more than 400,000 families—owed an entire year’s salary on their credit cards, a hole that was virtually impossible to dig a generation ago.27
But the critics are off the mark on one point—the role played by over-consumption or its ubiquitous cousin, “trouble managing money.” By 2001, those two reasons combined to account for less than 6 percent of families in bankruptcy.28 What about the rest? The overwhelming majority of bankrupt families faced far more serious problems. As we showed in chapter 4, nearly 90 percent had been felled by a job loss, a medical problem, or a family breakup, or by some combination of all three.
Potential Supreme Court nominee Judge Edith Jones asserts that “overspending and an unwillingness to live within one’s means ‘causes’ debt.”29 She is probably right. These families certainly overspent, accepting medical care they could not afford and making child support payments that left them with too little to pay the rent. They also lived beyond their means, trying to hold on to their houses and cars even after they lost their jobs. But we are forced to wonder, what would Judge Jones suggest those families have done? Not gone to the emergency room when the chest pains started? Moved the kids into a shelter the day their father moved out? Paid MasterCard and Visa, even if it meant not feeding their children? It is doubtlessly satisfying to point the long finger of blame at personal irresponsibility and overspending. But only the willfully ignorant refuse to acknowledge the real reasons behind all that debt.
Mortgaging the Future
Interest rate deregulation dovetailed neatly with a seemingly unrelated phenomenon: the bidding war for suburban housing. The mortgage industry shook off its interest rate regulations just a few years after the credit card industry.30 In the new world of unfettered mortgage lending, no longer would the middle-class family be restricted to a conventional 80 percent mortgage. The floodgates were opened, and families could get all the mortgage money they ever dreamed of to bid on that precious home in the suburbs—even if the price tag was more than they could realistically afford.
Competition for houses in good neighborhoods has always been stiff, and overloading on mortgage debt to purchase a better home has long posed a temptation for young families. A generation ago, however, it simply wasn’t possible to give in to that temptation;