My grandmother, when she was a teenager, drove a wagon in the land rush that settled Oklahoma. Her mother was dead, and her little brothers and sisters were in the back of the wagon. Her father had ridden ahead and tried to find a piece of land that might be somewhere near water--a hard task in Oklahoma. She grew up in that part of the world, she met my grandfather, they got married, they started building one-room schoolhouses and little modest homes across the prairie. They had kids, they stretched, they scratched, they worked hard, they made a little money, and they put it aside, put it in the bank. It got completely wiped out in 1907 in an economic panic. But like many American families, they came back. They started scratching and stretching again, and having more babies--and then the Depression came. And they got wiped out one more time.
You see, my grandmother was born into the world of boom and bust, boom and bust, as it had been from 1794 until the Great Depression. But my grandmother also lived in a world of economic transformation. Because coming out of the Great Depression, just three laws fundamentally altered the course of America's history.
The first one, FDIC insurance, made it safe to put money in banks. The second one, Glass-Steagal, tried to separate the risk-taking on Wall Street from your local community bank. And the third one, SEC regulations, provide some cops to watch the robbers. And so, out of that, what we got was 50 years of economic peace. No financial panics, no meltdowns. And during that 50 years, we built a strong and prosperous middle class in America.
Now, my grandmother, when she died in 1970 at the age of 94, had been part of that. She owned a little house, she had plenty of groceries in the cupboard, and she had some cash in the bank. She was part of the growth of middle-class America. As were her children and her grandchildren. But shortly after my grandmother died, within a few years, we began unraveling that. Part of it was on the regulatory side. We hadn't been clever about regulations. They stayed ossified. The regulations put in place in the 1930s had not been updated. They had not adapted to a new world. And along came a new group of people who said, "Let's just get rid of the regulations. What are they there for anyway? They just cost money. Dump the regulations." And so the regulatory framework, or the "cops," who were on the beat began to disappear. They lost their effectiveness.Another thing happened in that period of time, and that is the foundations of middle-class America began to erode. Start with income. Income and productivity across America had been intertwined after World War II. So every year, basically, productivity was going up--so were wages. But starting in the late 1970s those two begin to diverge, so that productivity continues to rise--indeed rise at a somewhat steeper rate--while incomes flatten out, so that today a fully employed male makes less money than his father made a generation ago, once we adjust for inflation.
On the income side, they're flat, but on the expense side, these families are not. The core expenses for the middle class--housing, health insurance, day care, college, the things that make a family safer, the things that make a family middle class, the things that let them invest in their children and the future--those went up, adjusted for inflation, by more than 100 percent. Families spent more, but they had flat incomes.
Now, anyone here can figure out what happens next. And that is, savings begin to decline, families who had put money away could no longer do it, and debt begins to rise. And families end up with more mortgage debt, more credit card debt, more car loan debt, more debt of every form. The credit industry then smells an opportunity. It says, "Wait a minute. The old regulations are gone, and middle-class families are under a lot of economic stress. There's money to be made in this situation." And indeed there was.
At first it was just the money of lending more, right? More money lent, more income coming in. Got that one. But over time, with the regulations having changed, the business model itself changed so that the old form of lending--the notion that you put the agreement out there, you can see what the interest rate is, you can see how often you have to make the payment, and what the payment is, and that's the deal: both sides get what the transaction is that model gave way to a very different pricing model. A "tricks and traps" pricing model. One in which the promise gets cheaper and cheaper: 7.9 percent financing; 3.99 percent financing; zero financing. Cheap, cheap, cheap. Why? Because the real plan is to make the money on the back end. The real plan is to bury the tricks and traps in the fine print, and make really big money back there.
Now what's the consequence of doing that? Well, the consequence is families can't price it. You can't tell up front how much it costs to take out these credit agreements, and more importantly families can't compare. So the old notion of a competitive market, where you compare products and the best products survive and the worst products get washed out, goes away. Who can tell in here--lay four credit card agreements in front of you--which one is actually the cheapest one? Which is the one that carries the lowest risk? Without a competitive market, the consequence is a big hole in the boat for consumers on credit, so that last year--you watch your numbers?--about $150 billion flowed out of the pockets of ordinary, middle-class families on penalty rates, on penalty rates of interest, on regular rates of interest, on credit cards, on payday loans, on check overdraft, on kickbacks on car loans, all out there coming out of the pockets of ordinary, middle-class families.
So that's where the market stood, and now we are here at an historic moment. President Obama signed into law the strongest financial reforms in three generations. And in my view, the strongest of those financial reforms is the Consumer Financial Protection Bureau. It's tough.
And I want to be clear: the president is the one who led on the consumer agency. He insisted it be in there, and he never wavered on that. So we have now the tools on the table to make significant change. The tools to let us get to a time when credit card agreements can be two pages long. When it's obvious what the cost of a mortgage is, and it's easy to compare across four mortgages or six mortgages. We can move to that time, but we gotta pick up the tools and use them. This agency must be built. It doesn't come--think about this statute that's just been passed. It has a few pieces in it about changes in specific law, but what it mostly is is about the tool of the new Consumer Financial Protection Bureau.
I wanted to talk to you for just a minute today about what it is that we might do with this bureau. What it is that--when we're building something new--what you want to build into its DNA. And so I thought of four things that we should think about as we begin to build a new bureau.
The first one is, it must stand for families. We've had long enough where there's been no one to stand for families. Now what does that mean? It means, in part, in the case of the credit agreements that we've been talking about, a level playing field again. It means that there's someone there to make sure that both families, and lenders, understand the terms of the credit agreement. That it is as obvious to one side as the other. That when they come together, they get what this transaction is. The cost. That we create competitive markets so that the products are products that are not only priced so that consumers can understand them, but they're priced well in the marketplace.
But it also means something else to stand on behalf of families. When powerful people get together in our government, and they start to divide up where things are going to go, when they start to make decisions about who is going to be helped and who is not going to be helped, there needs to be at least one person in the room who asks the question, "How will this affect America's families?" Not just how will it affect America's banks, not just how will it affect America's businesses, but how it will it affect America's families. One of the things this bureau can do is be there on behalf of American families.
But a second thing I think is really critical about this agency is it must be reality-based. It's not good enough to have a great theory. And frankly, it's not good enough to have just a good heart. It's got to be grounded in how things really work on the ground. So now I'm going to give you an example of that: small banks. If the consequence of this agency is to put in enough new bureaucratic obligations that it crushes community banks, then the agency will not have been successful. If the community banks are driven out of business, that creates more concentration in the banking industry. The big get bigger and the small go away. But it also means there are fewer of those banks around to lend to the small businesses that we're counting on to restart this economy. And it means that families themselves have fewer choices between small banks and big banks. And that's a choice we've got to preserve.
So ultimately what this agency has to be about is, yes, the first one on the side of the families, but second, the side of creating workable, realistic markets. Sustainable markets over time. Markets that work for consumers, but that also create a viable, functioning credit system. It's got to be part of what goes into this.
The third part is the bureau has to be able to grow and change. Part of what went wrong in the 1930s was that we didn't keep the rules up to date. The world changed around it. The markets changed around it. How families behaved changed around it. But the rules were not changing. They were not vital. And so, what this agency--what we have to think about when you're building in at the beginning is, "How do you build change? How do you build some creative destruction into the agency itself?"
I come from the world of bankruptcy. It's what I teach. Bankruptcy is littered with the businesses that didn't adapt to the world. Government doesn't have that same discipline in it. And so part of building this agency is building in how it will change and adapt over time. That it has the right structure to do that.
And then the last part I want to mention is part of why I'm here. This will be the first agency we have built in a wired world. Think about that for just one minute. The relationship between government agencies, between bureaucracy, between the government and its people. At the time we built all of the earlier agencies, it was one of... the government labors in relative obscurity, and you send out some information, and people get it through their newspapers, or watching television, or radio, or whatever they listen to. This is an agency that will be the first to be born digital. It will be an agency that will have the capacity to communicate with millions of Americans by just hitting a send button. It will also be an agency where millions of Americans have the capacity to communicate with the agency by hitting a send button. The possibilities here are endless. The notion that part of how one comes to understand and define the problems in the credit area will change if we hear--if this agency hears, if this bureau hears--from people who are experiencing it. This can be built into the research function of the agency. If the agency can hear from people and communicate with people, it changes the concept of how regulations work, of how regulations are tested, of how regulations are communicated, and of how they are enforced.
I think of this as a real opportunity, as we build this agency, not to replicate what was built last time when we had a consumer agency in the 1970s, but to try a whole new model. To think about this agency from a different perspective. That's why I came here today. I bought a plane ticket and showed up here because I have a specific task.
I wanted to talk to people who have a voice, and that's why I came to talk to you. There are three things I want to ask you to do with your voice. I want to ask you to use your voice on behalf of economic security for middle-class Americans. In a world in which so many people face so much insecurity, I want you to give them voice. I also want to ask you to use your voice for ideas. This is the place to let ideas be born, to let them bounce around, to let them get tougher, to let the bad ones die out and the good ones advance. This is where ideas should come from. And the third is, I'm going to ask you to use your voice as a voice of conscience in a world that sorely needs more conscience. You are our collective conversation on conscience.
I'm going to wrap this up by saying we have an opportunity now to pick up the tools that were laid out in this new Consumer Financial Protection Bureau. Unused tools don't do anyone any good. The point is to pick them up and use them. And it's going to be tough. The era of my grandmother in the Great Depression, it was tough then. Remember, Franklin Roosevelt faced his economic royalists. Remember, it took him years to get his entire economic package into place. It paid off. It was tough, but it paid off. So what I want to think about is what we do from this moment going forward. If you have any doubts about where we're headed and how much change we can make, I ask you for just one second to glance back over your shoulder at where we have traveled over the last year.
I was in Chairman Barney Frank's office just a few weeks ago--and Barney Frank deserves as much credit as anyone on this planet for keeping this Consumer Financial Protection Bureau and making it strong. So, Chairman Frank and I were talking about some details about the bureau, and what might happen, and not, in conference. We got to the end, and Barney looked up in that way he does--you know, over the top of his glasses, and he growled--because that's the only way I know to describe a conversation with Barney--he said [speaks in raspy, growling voice], "You know, Elizabeth, a year ago this idea wouldn't have even qualified as a pipe dream. And here we are."
And here's the best part of it when you're thinking about what we can do. We're not here today because the banks gave it to us. The banks did not, a year ago, say, "Well, we're really sorry we broke the economy, and, um, uh, we really appreciate that you put $700 billion and a few trillion in guarantees on the table to help bail us out, and therefore we're gonna support some regulation for ordinary families to kind of level the playing field, and just make sure everybody's getting a fair deal here, that you can read your credit card contracts and mortgage agreements...."
They didn't say that. They fought us every single inch of the way. They announced in August of last year that the consumer agency was dead. And why was it dead? Because they were going to kill it. They were quoted in the "New York Times." They were that sure of themselves. The lobbyists came out and said, "We will kill the consumer agency." And they announced it, and they re-announced it, and they re-announced it. They announced its death over and over and over. If you check the papers, the agency was still dead as of February of this year. But we didn't give up. We scratched, and we bit, and we hung on. And we didn't give up. And today here's where we are. With a good, strong set of tools to change the consumer market.
So let me wrap this back around. Is this going to save the middle class by itself--the consumer agency? I've written about the middle class now for two decades--and if you want to give me another couple of hours I could bend your ear about all that's happened here--and the answer is no. There's frankly too much that's broken. We've got to have change in labor policy, we've got to have change in health policy, we've got to have changes in education policy. That's what it will take to restore a middle class. But we also have to have changes in consumer credit policy. And the new bill is a big step in that direction.
So, here's what I want to say: One way or another, I'll keep pushing for the middle class. I hope you will too.
You see, my grandmother was born into the world of boom and bust, boom and bust, as it had been from 1794 until the Great Depression. But my grandmother also lived in a world of economic transformation. Because coming out of the Great Depression, just three laws fundamentally altered the course of America's history.
The first one, FDIC insurance, made it safe to put money in banks. The second one, Glass-Steagal, tried to separate the risk-taking on Wall Street from your local community bank. And the third one, SEC regulations, provide some cops to watch the robbers. And so, out of that, what we got was 50 years of economic peace. No financial panics, no meltdowns. And during that 50 years, we built a strong and prosperous middle class in America.
Now, my grandmother, when she died in 1970 at the age of 94, had been part of that. She owned a little house, she had plenty of groceries in the cupboard, and she had some cash in the bank. She was part of the growth of middle-class America. As were her children and her grandchildren. But shortly after my grandmother died, within a few years, we began unraveling that. Part of it was on the regulatory side. We hadn't been clever about regulations. They stayed ossified. The regulations put in place in the 1930s had not been updated. They had not adapted to a new world. And along came a new group of people who said, "Let's just get rid of the regulations. What are they there for anyway? They just cost money. Dump the regulations." And so the regulatory framework, or the "cops," who were on the beat began to disappear. They lost their effectiveness.Another thing happened in that period of time, and that is the foundations of middle-class America began to erode. Start with income. Income and productivity across America had been intertwined after World War II. So every year, basically, productivity was going up--so were wages. But starting in the late 1970s those two begin to diverge, so that productivity continues to rise--indeed rise at a somewhat steeper rate--while incomes flatten out, so that today a fully employed male makes less money than his father made a generation ago, once we adjust for inflation.
On the income side, they're flat, but on the expense side, these families are not. The core expenses for the middle class--housing, health insurance, day care, college, the things that make a family safer, the things that make a family middle class, the things that let them invest in their children and the future--those went up, adjusted for inflation, by more than 100 percent. Families spent more, but they had flat incomes.
Now, anyone here can figure out what happens next. And that is, savings begin to decline, families who had put money away could no longer do it, and debt begins to rise. And families end up with more mortgage debt, more credit card debt, more car loan debt, more debt of every form. The credit industry then smells an opportunity. It says, "Wait a minute. The old regulations are gone, and middle-class families are under a lot of economic stress. There's money to be made in this situation." And indeed there was.
At first it was just the money of lending more, right? More money lent, more income coming in. Got that one. But over time, with the regulations having changed, the business model itself changed so that the old form of lending--the notion that you put the agreement out there, you can see what the interest rate is, you can see how often you have to make the payment, and what the payment is, and that's the deal: both sides get what the transaction is that model gave way to a very different pricing model. A "tricks and traps" pricing model. One in which the promise gets cheaper and cheaper: 7.9 percent financing; 3.99 percent financing; zero financing. Cheap, cheap, cheap. Why? Because the real plan is to make the money on the back end. The real plan is to bury the tricks and traps in the fine print, and make really big money back there.
Now what's the consequence of doing that? Well, the consequence is families can't price it. You can't tell up front how much it costs to take out these credit agreements, and more importantly families can't compare. So the old notion of a competitive market, where you compare products and the best products survive and the worst products get washed out, goes away. Who can tell in here--lay four credit card agreements in front of you--which one is actually the cheapest one? Which is the one that carries the lowest risk? Without a competitive market, the consequence is a big hole in the boat for consumers on credit, so that last year--you watch your numbers?--about $150 billion flowed out of the pockets of ordinary, middle-class families on penalty rates, on penalty rates of interest, on regular rates of interest, on credit cards, on payday loans, on check overdraft, on kickbacks on car loans, all out there coming out of the pockets of ordinary, middle-class families.
So that's where the market stood, and now we are here at an historic moment. President Obama signed into law the strongest financial reforms in three generations. And in my view, the strongest of those financial reforms is the Consumer Financial Protection Bureau. It's tough.
And I want to be clear: the president is the one who led on the consumer agency. He insisted it be in there, and he never wavered on that. So we have now the tools on the table to make significant change. The tools to let us get to a time when credit card agreements can be two pages long. When it's obvious what the cost of a mortgage is, and it's easy to compare across four mortgages or six mortgages. We can move to that time, but we gotta pick up the tools and use them. This agency must be built. It doesn't come--think about this statute that's just been passed. It has a few pieces in it about changes in specific law, but what it mostly is is about the tool of the new Consumer Financial Protection Bureau.
I wanted to talk to you for just a minute today about what it is that we might do with this bureau. What it is that--when we're building something new--what you want to build into its DNA. And so I thought of four things that we should think about as we begin to build a new bureau.
The first one is, it must stand for families. We've had long enough where there's been no one to stand for families. Now what does that mean? It means, in part, in the case of the credit agreements that we've been talking about, a level playing field again. It means that there's someone there to make sure that both families, and lenders, understand the terms of the credit agreement. That it is as obvious to one side as the other. That when they come together, they get what this transaction is. The cost. That we create competitive markets so that the products are products that are not only priced so that consumers can understand them, but they're priced well in the marketplace.
But it also means something else to stand on behalf of families. When powerful people get together in our government, and they start to divide up where things are going to go, when they start to make decisions about who is going to be helped and who is not going to be helped, there needs to be at least one person in the room who asks the question, "How will this affect America's families?" Not just how will it affect America's banks, not just how will it affect America's businesses, but how it will it affect America's families. One of the things this bureau can do is be there on behalf of American families.
But a second thing I think is really critical about this agency is it must be reality-based. It's not good enough to have a great theory. And frankly, it's not good enough to have just a good heart. It's got to be grounded in how things really work on the ground. So now I'm going to give you an example of that: small banks. If the consequence of this agency is to put in enough new bureaucratic obligations that it crushes community banks, then the agency will not have been successful. If the community banks are driven out of business, that creates more concentration in the banking industry. The big get bigger and the small go away. But it also means there are fewer of those banks around to lend to the small businesses that we're counting on to restart this economy. And it means that families themselves have fewer choices between small banks and big banks. And that's a choice we've got to preserve.
So ultimately what this agency has to be about is, yes, the first one on the side of the families, but second, the side of creating workable, realistic markets. Sustainable markets over time. Markets that work for consumers, but that also create a viable, functioning credit system. It's got to be part of what goes into this.
The third part is the bureau has to be able to grow and change. Part of what went wrong in the 1930s was that we didn't keep the rules up to date. The world changed around it. The markets changed around it. How families behaved changed around it. But the rules were not changing. They were not vital. And so, what this agency--what we have to think about when you're building in at the beginning is, "How do you build change? How do you build some creative destruction into the agency itself?"
I come from the world of bankruptcy. It's what I teach. Bankruptcy is littered with the businesses that didn't adapt to the world. Government doesn't have that same discipline in it. And so part of building this agency is building in how it will change and adapt over time. That it has the right structure to do that.
And then the last part I want to mention is part of why I'm here. This will be the first agency we have built in a wired world. Think about that for just one minute. The relationship between government agencies, between bureaucracy, between the government and its people. At the time we built all of the earlier agencies, it was one of... the government labors in relative obscurity, and you send out some information, and people get it through their newspapers, or watching television, or radio, or whatever they listen to. This is an agency that will be the first to be born digital. It will be an agency that will have the capacity to communicate with millions of Americans by just hitting a send button. It will also be an agency where millions of Americans have the capacity to communicate with the agency by hitting a send button. The possibilities here are endless. The notion that part of how one comes to understand and define the problems in the credit area will change if we hear--if this agency hears, if this bureau hears--from people who are experiencing it. This can be built into the research function of the agency. If the agency can hear from people and communicate with people, it changes the concept of how regulations work, of how regulations are tested, of how regulations are communicated, and of how they are enforced.
I think of this as a real opportunity, as we build this agency, not to replicate what was built last time when we had a consumer agency in the 1970s, but to try a whole new model. To think about this agency from a different perspective. That's why I came here today. I bought a plane ticket and showed up here because I have a specific task.
I wanted to talk to people who have a voice, and that's why I came to talk to you. There are three things I want to ask you to do with your voice. I want to ask you to use your voice on behalf of economic security for middle-class Americans. In a world in which so many people face so much insecurity, I want you to give them voice. I also want to ask you to use your voice for ideas. This is the place to let ideas be born, to let them bounce around, to let them get tougher, to let the bad ones die out and the good ones advance. This is where ideas should come from. And the third is, I'm going to ask you to use your voice as a voice of conscience in a world that sorely needs more conscience. You are our collective conversation on conscience.
I'm going to wrap this up by saying we have an opportunity now to pick up the tools that were laid out in this new Consumer Financial Protection Bureau. Unused tools don't do anyone any good. The point is to pick them up and use them. And it's going to be tough. The era of my grandmother in the Great Depression, it was tough then. Remember, Franklin Roosevelt faced his economic royalists. Remember, it took him years to get his entire economic package into place. It paid off. It was tough, but it paid off. So what I want to think about is what we do from this moment going forward. If you have any doubts about where we're headed and how much change we can make, I ask you for just one second to glance back over your shoulder at where we have traveled over the last year.
I was in Chairman Barney Frank's office just a few weeks ago--and Barney Frank deserves as much credit as anyone on this planet for keeping this Consumer Financial Protection Bureau and making it strong. So, Chairman Frank and I were talking about some details about the bureau, and what might happen, and not, in conference. We got to the end, and Barney looked up in that way he does--you know, over the top of his glasses, and he growled--because that's the only way I know to describe a conversation with Barney--he said [speaks in raspy, growling voice], "You know, Elizabeth, a year ago this idea wouldn't have even qualified as a pipe dream. And here we are."
And here's the best part of it when you're thinking about what we can do. We're not here today because the banks gave it to us. The banks did not, a year ago, say, "Well, we're really sorry we broke the economy, and, um, uh, we really appreciate that you put $700 billion and a few trillion in guarantees on the table to help bail us out, and therefore we're gonna support some regulation for ordinary families to kind of level the playing field, and just make sure everybody's getting a fair deal here, that you can read your credit card contracts and mortgage agreements...."
They didn't say that. They fought us every single inch of the way. They announced in August of last year that the consumer agency was dead. And why was it dead? Because they were going to kill it. They were quoted in the "New York Times." They were that sure of themselves. The lobbyists came out and said, "We will kill the consumer agency." And they announced it, and they re-announced it, and they re-announced it. They announced its death over and over and over. If you check the papers, the agency was still dead as of February of this year. But we didn't give up. We scratched, and we bit, and we hung on. And we didn't give up. And today here's where we are. With a good, strong set of tools to change the consumer market.
So let me wrap this back around. Is this going to save the middle class by itself--the consumer agency? I've written about the middle class now for two decades--and if you want to give me another couple of hours I could bend your ear about all that's happened here--and the answer is no. There's frankly too much that's broken. We've got to have change in labor policy, we've got to have change in health policy, we've got to have changes in education policy. That's what it will take to restore a middle class. But we also have to have changes in consumer credit policy. And the new bill is a big step in that direction.
So, here's what I want to say: One way or another, I'll keep pushing for the middle class. I hope you will too.
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