President Obama’s nomination of former Ohio attorney general Richard Cordray to head the new Consumer Financial Protection Bureau may finish off the brief political career of the most eccentric and poorly understood figure of the finance crisis. It was Harvard law professor Elizabeth Warren who dreamed up the CFPB in 2007, and it was she who spent the past year running it. Now she will return to Cambridge, either to teach or to run for Senate against Republican Scott Brown.
It is not surprising that Warren found no place in Washington. The cameo role she played on the national stage made her an idol to the leftmost part of President Obama’s coalition and a hate object for conservatives—and yet her understanding of the financial crisis is best described as populist, conservative, even right-wing. It arises from what has happened to the American middle class in the past four decades.
Warren’s Harvard affiliation is something of an incognito. By her own account, she comes from an Oklahoma family whose only claim on the adjective “middle class” was its avoidance of the word ain’t. When she was 13, her father, a maintenance man, had a heart attack and had to stop work. Her mother got a job in the catalog-order department at Sears until he was well enough to return. Going bust was something her family narrowly avoided. Warren has devoted the last decade of her career to explaining why those who wind up in similar positions today are seldom so lucky.
In 2003 Warren cowrote a brilliant and counterintuitive work of pop economics called The Two-Income Trap. People were going bankrupt at an alarming rate. Since the 1990s, more children had experienced their parents’ bankruptcy than their parents’ divorce. And yet the economy was booming. So senators like Orrin Hatch seemed to be on solid ground when they attributed these bankruptcies to people who “run up huge bills and then expect society to pay for them.” Warren herself later said she was looking for some failure of self-control, for “too many Gameboys.” But this was not the case. Bankruptcy was actually getting harder to declare, Warren proved. For bankrupt families, the ratio of nonmortgage debt to income rose from .79 in 1981 to 1.06 in 1991 to 1.5 in 2001. To quote, italics and all, the most stunning line in her book: “Having a child is now the single best predictor that a woman will end up in financial collapse.”
Why this was so had nothing to do with consumerism. Parents spent 32 percent less on clothing, and 52 percent less on appliances. What they spent more on was big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent). And the reason for all but the last of these was the entry of women into the workplace. Working mothers “ratcheted up the price of a middle-class life for everyone, including families that wanted to keep Mom at home,” Warren wrote. As a result, she showed, two-income families have less disposable income than one-income families did in the old days. What is more, today’s families are deprived of a safety net—a spare worker—of the sort her own family was able to lean on when she was a child. If anything goes seriously wrong in your average two-earner family today, they are in grave financial jeopardy.
You can euphemize this account any way you like—and God knows Warren tries—but Michele Bachmann would find nothing to object to in this narrative. It is a straightforward telling of the Tragedy of Feminism, tinged with populism. Warren’s explanation for exploding real estate prices involves white flight: “As families saw urban centers as increasingly unattractive places to live,” she writes, “the range of desirable housing options began to shrink and parents’ desire to escape from failing schools began to take on new urgency.” She complains that the federal safety net “serves only one segment of the population: the poor. . . . But what about the middle class? What is their safety net?” She calls for school vouchers. At times, her complaints on behalf of the middle class sound positively Nixonian.
But Warren’s understanding of our present predicament has a second part that is less archetypally right-wing, and this is the part that got more notice after the crash of 2008. It concerns the belief that banks are ever doing their best to rip people off and cheat them out of their money. Invited by the late Oklahoma Democrat Mike Synar to work on a congressional bankruptcy commission, she discovered some of the ruses banks used to trap people in punitive lending arrangements. No one who has applied for a credit card recently will be inclined to disagree with her, and the ruses have grown worse since then. Consider those 7.9 percent credit card rates that increase to a 29.9 percent “penalty rate” once you miss a payment by a day. Or those 18-page Bible-paper documents with all sorts of important account changes written in 7-point type, one of which explains that your account is about to be cleaned out via hundreds of dollars in arbitrary fees.
The real heyday of subprime had not yet begun when Warren wrote her book, but its principles were already in place in the banking industry. Almost anyone who uses a bank will have a story of making a $1,000 deposit drawn on a bank across the street, meant to cover four $200 checks written two days later and cashed four days after that—and seeing the bank put a hold on the deposit just long enough so they can collect $35 “bounce” fees on each of the four checks (although the checks do not actually bounce!).
Warren was outraged at such chicanery long before the economy tanked. That is why she retains so much credibility among neutral observers, and why her approach to the finance crisis took the consumer-protection form that it did. It may not have been the most effective way of approaching the finance crisis, but it was the way most Americans understood. You could tell there was a finance crisis because real banking—i.e., borrowing at low interest and lending at high—was disappearing from the American system, replaced by this sneaky game of devious tricks and arbitrary penalties.
Unfortunately for Warren, no one was in a position to promote her politically for her pains. She was the only white working-class Democrat left in captivity. Republicans saw her as a Naderite and also someone who might steal a bit of their own thunder. Democrats saw someone who was quite possibly a Democrat only through Ivy League peer pressure or lack of self-knowledge. Almost every step the Obama administration took in the early stage of the crisis pitted its own heavy hitters against her. When Warren was involved in the congressional TARP oversight panel, she quarreled with Treasury Secretary Tim Geithner over why the insurer AIG was bailed out in such a way as to make whole all of its creditors—notoriously including Geithner’s friends at Goldman-Sachs. She was right and won the argument. Geithner was more strident and won the battle.
There were good reasons for the president not to nominate Warren, including the ones advanced by congressional Republicans. That anyone should run a bureau of his own design is an affront to the spirit of separation of powers. Warren understood economics less well than many of her congressional interlocutors, and she understood diplomacy less well than any of them. But she understood the finance crisis better, she was the first to see it coming, and she did so by the simple means of listening to the American middle class. That is not nothing.
Christopher Caldwell is a senior editor at The Weekly Standard.