Posts Tagged ‘middle class’

Elizabeth Warren Predicted The Financial Collapse Back In 2004

 

Elizabeth Warren,  a Harvard Law Professor and the current chairwoman of the Congressional Oversight Committee in charge of overseeing usage of the TARP bailout funds, predicted the financial collapse long before anyone else was talking about it.

In this 2004 interview with Dean Lawrence R. Velvel where she discusses her book, The Two Income Trap,  she reveals the instability that pervades the lives of most middle class Americans and why so many end up in Bankruptcy court. She says that in order to keep up with the expenses, people with median incomes have been forced to borrow and borrow. Why? Because the median income in the United States is increasingly not enough to keep up with the cost of living. She talks about the fixed expenses that families have, such as the mortgage payment, health insurance, and educational expenses as having grown dramatically in the last generation. It is important to understand, here, that, these fixed expenses can’t be cut back.  That’s why they’re called “fixed expenses.”

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The Over-Consumption Myth Is Keeping Us From Enacting Meaningful Financial Services Reform

Despite the persistent rhetoric that people in financial trouble deserve to be there because they made poor choices and now must face the consequences of those choices, the real story behind why so many American families are riding the edge of financial devastation is not as simple as that.

As Elizabeth Warren explains in her paper entitled the Over-Consumption Myth,  the average middle class family carries more debt than it did a generation ago. However, this debt is not due to overspending on frivolous items such as designer clothes, designer foods, or big screen televisions.

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Elizabeth Warren On The Collapse of The Middle Class

My arm is hurting too much for me to type much today, so I bring you a video of a great talk by Elizabeth Warren, who currently is overseeing the TARP bailout and is a Harvard law professor. She’s a very smart woman who saw the financial collapse coming. It’s a bit long but worth a listen.

 

A Tale Of Three Families: Do Bad Decisions Lead To Financial Trouble?

A comment left on this entry by About.com’s LaToya Irby got me to thinking about people in financial trouble and how they got there, leaving aside for the moment the catastrophic economy that we’re in today.

In the best of all worlds, no one would ever spend more than they can afford and everyone would be debt free. However, we know that the world is far from perfect and people often make financial decisions based on emotion and necessity.

Consider a young couple with a child living on minimum wage. The husband works two jobs and the wife works one, and together they earn enough money to live with a little extra to spare. They decide to use that little extra bit they’re able to pull in to save towards buying their child an Xbox 360 as a Christmas present. December rolls around and they have the money saved up when disaster strikes. The wife breaks her leg and is out of work for six to eight weeks. Their Xbox 360 fund suddenly becomes a lifeline, but Christmas is still coming and they still want to see their child’s face light up when he opens up his gifts to see that he has a new Xbox 360. The family buys the Xbox on a store credit card.

Then there’s the solidly middle class two earner family. Both parents work in good paying jobs and on that income, they’re able to afford a decent house in a nice neighborhood. They run small balances on their credit cards and are paying part of the tuition for one of their children who is in college and braces for their middle child. Everything is fine until the husband gets laid off. Suddenly, the family’s income is cut in half and they dig into their savings to continue to pay the bills that don’t stop coming simply because of a lost job. Time drags on and the husband can’t find work. His industry has gone under, but the bills keep coming. Now this family is relying on their credit cards to make ends meet.

Finally, there’s the family earning six figures. This family is among the affluent and well-to-do. They live in a large house in a gated community and drive expensive cars. Curiously, just like the middle class family and even like the poor family, when one of the breadwinners no longer has a job, what was a rosy financial picture starts looking dingy and grim.  Because this family had been affluent, there is room for cutting back and for making lifestyle changes to adjust for lower income. They sell their expensive cars and buy cheaper ones. They don’t spend as much money as they are used to. However, some of the bills of the affluent lifestyle remain and can’t be gotten rid of. Among these is the house with the now unaffordable mortgage payment. This once affluent family now faces foreclosure.

These stories are purely hypothetical, but hundreds of them play out daily in real life. In the first case, human emotion and the desire to make a child happy result in what to cold hard facts is an irrational financial choice. In the other cases, it is about continuing to pay the bills that continue to come in the mail even when the income to pay them is no longer there.

To suggest that people in financial trouble got there because of poor decision making is too simplistic. It is never that black or white. Emotions and circumstance play a role and one can’t predict what lies beyond the next turn down the road of life.

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