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Joanne Alter Women in Government Lecture

Elizabeth Warren
Remarks as Prepared for Delivery
Wednesday, February 23, 2011

Thank you, Lisa. It is a special privilege to share the stage this evening with Attorney General Madigan as we talk about women in government. Lisa’s strong leadership in the fight for a new consumer agency was critical in our David-versus-Goliath battle. I am very glad to have the chance to say publicly: Thank you for all you have done. You’ve been amazing.

It is an honor to be here to commemorate Joanne Alter, whose commitment to meaningful change – both inside and outside of government, despite all odds – still inspires us.

At a time when women were excluded from public life, Joanne walked right up to Chicago Mayor Richard Daley and told him he needed to bring women into the mix. When the Mayor put Joanne on the ticket, I’m not sure he knew what he was getting himself into. Not afraid to speak truth to power, Joanne helped clean up both Chicago’s environment and its politics. She acted with the conviction of a woman who saw things for what they were. Chicagoans continue to reap the benefits of her trailblazing work.

My journey into public service began more than three decades ago with an attempt to see the economic situations of families in trouble for what they were. I was a young mother, struggling with daycare and trying to find a place in a nearly-all-male legal profession. I was teaching law at the University of Houston, learning contracts and commercial law just fast enough to stay a half-step ahead of my students. I was also expected to do research. With a new bankruptcy law in place, I thought I had the right question: Who files for bankruptcy, and why?

Having heard claims about unscrupulous debtors, I expected to find families who took advantage of a generous country and a forgiving law, running up bills they didn’t plan to pay and canceling their debts in bankruptcy. That wasn’t what I found.

Middle Class Squeeze

The numbers are sobering. Since the late 1970s, bankruptcy filings have doubled and doubled again. Women have been hit particularly hard. Over the course of 20 years, the number of women filing petitions for bankruptcy increased by 662 percent. By the early 2000s, a woman was more likely to file for bankruptcy than to graduate from college.

For some researchers, this sounded like a familiar refrain about poverty. But the people in bankruptcy, while in terrible financial trouble, weren’t the long-term poor. They had gone to college, gotten decent jobs, and bought homes. In fact, over 90 percent of those in bankruptcy could fairly be described as middle class. For me, that just deepened the mystery of the story. What had gone so wrong to cause more than a million middle class families to file for bankruptcy every year?

Here, the data told – and continue to tell – a very clear story: families have been spending more of their income on core expenses like mortgage payments, car payments, education, child care, and health insurance. These are big, recurring expenses, not the kind that are easy to cut back for a few months if the family faces a layoff or a sudden medical bill or expensive home repair. And at the same time that families were strapped to ever larger monthly payments, incomes stagnated. Adjusted for inflation, a fully employed male earns less today than his father earned a generation ago. This has been a terrible one-two punch for middle class families.

The consequences have been dreadful. After core expenses are deducted, the average two-income family today actually ends up with less money left over than the average one-income family in the 1970s.

Fully 70 percent of the income of today’s family is dedicated to covering fixed and recurring core expenses. Families are constantly squeezed, and they have almost no room to regain their financial balance if anything goes wrong.

The families I researched were not indulging in unnecessary goods. Rather, they were working hard and making long-term commitments to build middle class lives. In order to pay for medical bills, mortgages, and college, these families increasingly turned to debt. And for many, debt became a way of life just to make it to the end of the month.

Unwinding the Rules of the Road

As families became more economically vulnerable, credit became more economically profitable for lenders. Banks used to lend only to consumers who clearly demonstrated an ability to repay. But new industry products and practices emerged that both downplayed this fundamental precept and made consumer financial services more lucrative – at least in the short term.

Some lenders realized they could boost earnings by targeting consumers whose ability to repay was doubtful. It turned out that the combination of high interest rates, penalties, and fees meant that if consumers paid for a few months, loans would be profitable – even if a sizable percentage of the customers eventually defaulted. And the customers who bounced around – falling behind and catching up, paying on time and paying late – were pure gold. Even people with good payment histories produced new revenues, particularly when they bought higher-priced credit products than their credit scores would have indicated they should have. Over time, some lenders discovered that the more they could obscure the cost of a mortgage or credit card from a consumer, the more short-term profit the lender stood to gain.

Credit card lenders led the way, expanding their contracts from a page and half to more than 30 pages, with tricks and traps hidden in the fine print. Other forms of consumer lending soon embraced the approach. Teaser rate credit cards – advertising low, low interest rates – were followed by teaser rate mortgages, with lenders emphasizing an amazingly low rate upfront rather than the amazingly high rates that followed.

This story does not absolve borrowers of responsibility. Personal responsibility is as important as ever. There were Americans who willingly took on too much debt or who used credit to buy things they knew they could not afford. But to understand these markets and the forces at play, we must start by recognizing that the consumer finance landscape fundamentally changed. Competition evolved. It was no longer a race to offer the best and cheapest product. Instead, it was a scramble to make the front-end price seem the lowest while making real profits on the back end – hiking interest rates and tacking on high fees, or at least building in the wiggle room to do so. The result was that a lot of consumers heard one price when they signed up, only to pay a very different price later on. This lack of clarity obscured the real cost of credit and made it hard for families to choose which credit products best met their needs. What happened next is history: Credit card tricks and traps generated tens of thousands, if not millions, of consumer complaints, and risky mortgages injected so much risk into the system that they nearly pushed our entire economy off a cliff.

A Private-Sector Solution? Clean Cards

Working at the new consumer bureau isn’t my first effort at repairing the broken consumer credit markets. A few years ago, I had an idea for a Clean Card, a way to reform the credit card market without government help. A licensing group would certify that a card was “clean” if there were adequate upfront disclosures, reasonable fees, and protections against arbitrary rate increases. Clean Cards would work like the Good Housekeeping Seal of Approval or the Underwriters Laboratory seal – a signal to consumers that the product met certain standards and was unlikely to throw your family into a financial abyss. The Pew Research Center backed the idea and put up money to develop and market it. They hired a big-bank consulting company to show us how the card profits were made and how to sell the Clean Card. I thought we could change the market.

So we took the idea to a number of industry leaders – you would recognize the names. The first couple of meetings with these executives were all pretty much the same. As we walked them through the features of the Clean Card program and the benefits to their business, visions of increased market share danced in their heads. They saw the benefit of being seen as the most trustworthy player in the market and the possibility of using that goodwill to cross-sell other products. They recognized the potential for what economists call a “first-mover advantage” – a fancy way of saying that you can make a lot of money with a good idea before the competition figures out how to catch up.

By the third meeting, reactions changed dramatically. Remember: We just wanted the companies to make the price clear up front. We didn’t ask for any price restrictions or any limits on what they could charge or restrictions on innovation. But after they had run the models through their internal tests, the companies all had the same response: Thanks, but not interested. As one executive told me, “If we had to tell people what these things cost while our competitors play the same old games, no one would use our product.”

The problem wasn’t that these companies charged more than their competitors. In fact, I think they were all probably somewhere in the middle. The problem, as they put it, was that if they stated the price clearly while competing against companies that pretended to sell similar products for much less, they couldn’t get anyone to buy their cards. All the card issuers had buried so much revenue in the back end – in the penalties, fees, and interest rate hikes – that the first one to tell the truth about the costs would lose, not gain, market share. There was no advantage to being the first mover.

In that moment, I realized just how broken the consumer credit markets had become. I understood that the solution was to have a new cop on the beat to make sure that prices were clear up front and to wipe out the tricks and traps that had become so profitable. That was the only way markets would really work.

A Public-Sector Solution: The Consumer Financial Protection Bureau

The only way to make this happen is through law. Thus was born the idea for the consumer agency. And that is why I am now in government, taking on the job of building the new consumer bureau. I want to be part of the solution so that middle class families get back on steady footing – to make the costs of credit products clear and to make competition work for those families, not against them.

I believe in markets, and I believe that consumer financial markets can work to drive down prices and increase customer value. But those markets work only when prices and risks are clear, when families are empowered and informed to make the decisions that are best for them, when no one gets a competitive advantage by tricking a customer, and when lenders are rewarded for offering innovative and beneficial products in a transparent way.

I trust Americans to make the right decisions once those elements are in place. When people can tell what they are buying – when it is easy to compare a mortgage with three other mortgages or a credit card with three other credit cards – then true competition kicks in and markets can work. When families aren’t choking on fine print and obscure legal terms, then they don’t have to worry about what surprises are hidden in the deal. And when consumers can focus their attention on comparing real costs and risks, then issuers of credit will have to compete straight-up for business – and give customers meaningful innovation.

At the new consumer bureau, we have been working hard to establish the basic principle of clarity in credit products – spreading the message in meetings with industry and consumer advocacy groups alike. And when we say clarity, we mean it. Not pages and pages of fine print, with important terms hidden among the words like a giant “Where’s Waldo” puzzle. We mean short agreements, understandable to real consumers, with the important terms clear up front.

A Cop on the Beat

Rules requiring transparency are important, but rules alone won’t get the job done. Those rules must be carefully and consistently enforced. For any given credit product – for example, a mortgage – the oversight and enforcement should be the same regardless of whether the product was issued by a nationally chartered bank, the affiliate of a bank holding company, or a state-chartered non-bank mortgage broker. The CFPB will put an end to the old regime in which the type of institution, rather than the product they were selling, determined the rules they really had to follow.

Supervision and enforcement also need to reflect a real commitment to consumer protection. It cannot be halfhearted. Prior to passage of the financial reform law, authority for consumer protection was scattered among seven federal agencies. Each regulator had a primary function, and, for most, consumer protection was second fiddle to the agency’s primary mission. There were also basic problems of accountability. The tangle of seven agencies failed to create effective rules and left gaping holes in oversight. Since everybody had a slice of responsibility for protecting consumers, no one agency had ultimate responsibility for ensuring that families were in fact protected. Multiple agencies also meant that financial companies had been able to choose their own regulators in order to evade serious scrutiny.

Fragmented oversight also means that no one is in a position to spot a problem and address it before it spins out of control. Think about this example: Academics and consumer advocates were sounding the alarm four years ago about significant errors in mortgage servicing. Not one single regulator took notice. If the consumer bureau had existed then, it could have acted before the servicing scandal grew to dangerous proportions and shook the financial services industry and the entire mortgage market. “Robosigning” and “foreclosure fraud” could have been pinched off before they became part of our national vocabulary.


By making the prices and risks of consumer financial products clear, the consumer bureau will go a long way toward preventing a repeat of the economic crisis that has nearly broken us. The bureau will facilitate comparison shopping. It will make competition more visible, robust, and value-enhancing. That’s the way it works in other markets – and it can work that way in the consumer credit market as well.

I chose public service because I believe that Americans deserve better. We deserve a financial system that works, not one that’s stacked against us and that puts so much risk into the larger economy.

We need rules that let markets work for all of us. The recent financial crisis was a reckoning. Our economic security rests on whether we can design a sustainable regulatory framework that promotes meaningful innovation and strong competition. Whenever our country has faced economic reckonings in the past, the government has played a vital course-correcting role, providing a way forward that serves the common good. Women have historically provided key guidance at these junctures, with Joanne Alter representing just one example. Women are needed now more than ever.

With this new consumer bureau, we have a chance to help Americans in an enduring and significant way. I am following Joanne in saying, I’m eager to do my part.