Elizabeth Warren: Middle Class Lacks Security

With her appointment to head up congressional oversight of Uncle Sam's $700 billion bank, Elizabeth Warren has come to symbolize much of the skepticism surrounding how that money is being spent. An expert on the middle class and a law professor at Harvard, Warren has long warned about predatory lending and growing household debt levels. Her panel has already criticized the Treasury Department for not doing more to help struggling families and has called for greater transparency in the use of the bailout funds. I spoke with Warren about the state of the U.S. economy and its impact on middle-class life. Excerpts:

What caused our current recession?

This recession started years ago with declining wages and rising core expenses. Families tried to adjust by working more jobs and longer hours, depleting their savings, and taking on debt. Now, the American family is crushed by debt, and job problems will make the problem worse. ... The financial system can't be stabilized without stabilizing families. If families continue to choke on debt they cannot pay, the whole system will continue to falter. 

What should the government do to help households?

Stopping the tide of foreclosures would help a great deal. Both because it would keep some families out of complete economic collapse, and it would let others stabilize the value of their biggest asset, their homes. It would also stop the continuing deterioration of some communities, and it would be good for jobs.

What effect is this recession having on the middle class?

America's middle class is at a turning point. The outcome of this recession will either be a significantly strengthened middle class--which has less debt and a stronger safety net, both on its own and through new government regulation--or the middle class we once knew will disappear. [In that case,] America will move to a two-class economy--a substantial upper class that's financially secure and then a very large underclass that lives paycheck to paycheck.

That's a scary scenario. What will determine which of those two outcomes we'll see?

Partly, it will be government policy. That's why we're at such a critical juncture. A market with inadequate safety regulations has left the middle class stripped of its economic security.

Do you really think people will stop taking on so much debt?

I hope one of the lessons of this crisis is that debt is very dangerous for individual families. Over the past 30 years, families have taken on more debt, sometimes voluntarily and sometimes because lower wages and rising costs meant it was the only way they could live even a basic middle-class life. If families are more reluctant to take on debt, it will be a tough transition as housing prices come down and retail prices slow. But in the long run, we will have stronger, healthier households.

What can middle-class families do to improve their financial security now?

Don't carry credit card debt. ... [It's] a warning that you're in big trouble. The main advice is pay off short-term debt. Then, pay off the car loan. If both are paid off, then the mortgage. A family with less debt is a more secure family.