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Week of 11.13.09

Transcript: Elizabeth Warren on the Economy

BRANCACCIO: Lets figure out this economy? We read of a Dow up 25%, from the lows of last fall. And those tidy—if not gigantic—banker's bonuses are back. But at the same time unemployment has skyrocketed. Federal figures show that one out of every six workers is unemployed or underemployed - that's the highest figure since the great depression. Elizabeth Warren is uniquely suited to make sense of all this. She's the Harvard professor heading up the congressional oversight panel overseeing how the bailout money is being spent. Senior correspondent Maria Hinojosa sat down with warren for her take on the economy.

HINOJOSA: Welcome back to Now on PBS, Elizabeth.

WARREN: Thank you.

HINOJOSA: So, let's start big picture. About a year ago we were on the brink of financial collapse. Where did you think we were gonna be one year later, and where are we really?

WARREN: I think the answer is nobody goes to bed now and worried that, when we wake up tomorrow morning—that—that markets will have disappeared. But the things that drove us here are still here. And most importantly, the rules, the regulatory rules of the road, what you can and can't do on Wall Street, in financial institutions, have not changed.

HINOJOSA: So, did we make any progress?

WARREN: Look, we made progress in the sense that—we didn't implode. And there are a lot of people who say we would have. You know, we'll never know.

HINOJOSA: But we thought that things were going to change. We thought we were on the brink of crisis, things are changing, regulation, new laws. What happened then?

WARREN: Well, we did make one big change. And that is we now know that the government will race in to rescue large financial institutions. And this is really important because it has changed the whole economic market. The part that has changed is that now we see the government as either an explicit or an implicit guarantor of huge parts, big, of the big part of the financial institution's system. And that means pricing is distorted. And it means we live in a world of moral hazard, squared.

HINOJOSA: When you say we live in a world of moral hazard right now, what do you mean?

WARREN: What it means is, think about the business plan now for—a financial institution, a big bank that has a government guarantee behind it. In effect, they can say to the investors, "Hey, come invest with me. And I'm gonna take it all to Las Vegas, and I'm gonna bet it on red 22. And if it comes in, we are rich. And if it doesn't come in, the taxpayers will pay you back."

HINOJOSA: So, this is capitalism for dummies, and the US taxpayer is the dummy?

WARREN: Well, this is capitalism in a world in which the government either explicitly or implicitly says, "We will throw as many taxpayers under the bus as we need to, to keep these large financial institutions afloat."

HINOJOSA: All right, so, people are hearing that now that DOW is over 10 thousand, that—for example, Goldman Sachs now has a bonus pool of $16 billion. And so, there's a kind of rah rah, things are looking good again? We're also at ten percent unemployment. So, what's happening here?

WARREN: Well, those are actually two pieces of the same puzzle. Things are looking good at the top because they have fabulous guarantees, because we have pumped literally hundreds of billions of dollars into these largest institutions. And if that's not enough, we guaranteed them. Even after they left Tarp they have guarantees. And for those within Tarp, Citibank right now is sitting on a $300 billion guarantee from the American taxpayer. Of course their stock is up. Why wouldn't their stock be up? Look at the message here. The—the problem is the rest of us, the real economy, what's happening with unemployment, what's happening with foreclosures, whether or not we really have a plan, and frankly—whether or not our government is behind the rest of us, rather than seeing us as someone who will pay the bill for those other guys. Are we working on government plans and—and—and government ideas to support the middle class, the working class, to support the real families in America?

HINOJOSA: All right, we spent some time with a family. This is an American soldier who had just come back from Iraq. And he was unable to find a job. So, while he was waiting to get his disability, he started relying on his credit cards.

CLIP: BRANCACCIO: Andrew Spurlock and wife Michelle are struggling to raise three children, and pay off a credit card debt that is threatening to drag them under. The job Andrew and Michelle had counted on fell through. And then, Andrew's military disability payments were delayed. They took cash advances to help with the mortgage, and used the cards for gas, food, and diapers. And then Michelle got a surprise in the mail. The minimum monthly payment on one of her cards had jumped from $90 dollars to $270 dollars.

MICHELLE SPURLOCK: So, I call to find out—this is a mistake. It has to be a mistake.

BRANCACCIO: It's almost three times higher than you expected.

MICHELLE SPURLOCK: Right. The interest rate went from seven percent to 30 percent.

BRANCACCIO: Thirty percent, 3-0?

MICHELLE SPURLOCK: 3-0. And when I called, you know, during that phone conversation, "Isn't there something you can do? We're already having trouble making the—the minimum payment of $90, and now it's three times that much. And I've never in the eight years I've had this credit card ever paid late.... is there anything?—" "No, there's nothing we can do."

HINOJOSA: Since our story aired, things have only gotten worse for consumers with credit cards. Listen to Congressman Barney Frank last week.

FRANK: "They have retained the right unilaterally and retroactively to raise the interest rate on what you already owe them. It is the single unfairest economic transaction I can think of that doesn't involve a pistol!"

HINOJOSA: Over the last several months, many, many Americans have seen this happening, where their credit card rates are—are doubling, tripling, going as high as—as 30 percent. Why?

WARREN: Why? Because they can increase profits this way. And there's no one to stop them. They are raking in, literally, more than $100 billion a year from ordinary, hard-working, middle class families on just credit cards alone. And they're lobbying Washington really hard to try to keep that in place.

HINOJOSA: Well, but—but didn't the Obama administration sign legislation in May that basically said, "This is not gonna be—you're not gonna be able to play like this anymore"? So—

WARREN: But the laws don't go into effect until February. And so, frankly, the card companies are getting in as many punches as they can, as quickly as they can, because the law won't have any retroactive application.

HINOJOSA: That's why some in congress are now trying to move up the start date for the credit card reforms....claiming companies are taking advantage of the waiting period to hike up rates ahead of the new rules.

WARREN: There are fees for people who pay on time. There are fees for people who don't carry balances. There are fees for being inactive with your credit card. Because the whole point is to—is to customize the product around every single family, to figure out how to wring every last dollar out of them. That's the business model.

HINOJOSA: So, this is happening from ce—credit cards that are tied to banks, that the American taxpayer bailed out, like Bank of America we now own 34 per—34 percent of—of Citi? And they're raising their rates and doing these shenanigans?

WARREN: Yes, ma'am.

HINOJOSA: And when these banks, for example, when they say, "Look—you know what, we have to raise our rates because it's a risky time out there, and there are a lot of people who are defaulting, and we have to protect ourselves," you say?

WARREN: I say they have figured out an improvement on their profit model.

HINOJOSA: Why are you so anti-credit card?

WARREN: I'm not anti-credit card. Check my wallet. I've got two. I love having a credit card. I think it's terrific. I am anti-tricks and traps. I wanna see Americans carry credit cards. But I wanna see credit card agreements that are a page and half long. I wanna see—

HINOJOSA: In big letters?

WARREN: In big letters, and the key terms are right there in front of me, so that I can compare one to another, to another. I can figure out which on is cheaper. I can figure out what the risks are associated with it. And then, I know that the market works for me.

HINOJOSA: Alright, let's move on to the issue of foreclosures. We have spent a lot of time going and reporting about foreclosures across the country. And—and one of the things that shocking is when you see a map, and you kind of see these dots representing foreclosed homes all across the country. Lets take a look.

CLIP: BRANCACCIO: What brought me here was a 15 by 15 block map of part of Minneapolis. Each one of those dots represents the misery of a house or apartment or building in foreclosure. This is a map of Shelby County. Every dot on this map represents a completed foreclosure for 2008. Over the past nine years, foreclosure hit nearly one in ten households in the county. Think about it, all these red dots represent real people, displaced families.

LOCKWOOD: Every one of these houses is a failure. Somebody went bankrupt. Somebody got sick. Sixty percent of the people that we run into are losing their houses—have been ill. Broke a leg. Had a heart attack. Something. And it—it suspended their income.

BRANCACCIO: Here in the Frayser neighborhood, the foreclosure wave has been the financial equivalent of a neutron bomb. People disappear but the structures are left standing. Each of the personal tragedies behind foreclosure has a ripple effect on neighbors, neighborhoods and surrounding cities and towns. That means this is your problem too, even if you're doing fine with your own mortgage at your own bank.

HINOJOSA: Has the government done enough to protect homeowners—at this point in terms of foreclosures, or not?

WARREN: We have not developed a robust program to get ahead of the foreclosure problem. Part of the problem is that the government showpiece program is really directed toward the problem that existed six months ago, which was all about sub-primes and escalating payment rates. Now, the foreclosure problem has spread, the contagion. And more families with—who are unemployed has made the problem even bigger.

HINOJOSA: And they don't get that kind of help?

WARREN: And they don't get the help. They—they're not eligible for the program.

HINOJOSA: We reported on just that, so let's take a look.

CLIP: AUCTIONEER: once, twice, third and final call. Sold $58,000.

BRANCACCIO: On the streets of Baltimore, in front of the courthouse, it's a frigid January day. There is no bailout here. 100 foreclosed homes are being auctioned off. Each transaction the end of someone's American dream. The same scene plays out here day after day.

AUCTIONEER: Third and final call...sold back to the lender.

BRANCACCIO: Elijah Cummings, a Democrat, is the U.S. Congressman from the city of Baltimore. What are you hearing from folks in your district about how this bailout is—is helping them?

CUMMINGS: They don't see it helping them. And the insult to injury is that it's their tax dollars that are bailing out Wall Street.

HINOJOSA: So, taxpayers, essentially have paid out a trillion, with a T, dollars to help in bailouts for Wall Street, for AIG, or auto companies. But in essence, the help for families facing foreclosure, stuck, going nowhere?

WARREN: Well, it—I don't wanna say that. It's—there is a program. And the families who get help, god bless, I mean—it helps somebody. And every family that gets helped, I'm glad that the case. Good for the family—actually, good for the investor, and ultimately, good for the community they live in. Too little, too late. We gotta do better than that.

HINOJOSA: But the Obama administration supposedly was saying, "Look, we have the priorities straight. We are going to help the American family." So, what are we to take away from that?

WARREN: Too little, too late. We've got—if—if we wanna get ahead of this problem, we've got to do more. And—and look—I wanna be clear, there are multiple ways we can address this problem. One, is we can put more money into it. We certainly put money in at the top. We've put a lot less money into the home mortgage foreclosure process. But the other part, is we can talk about the investors in these mortgages, who can be forced to absorb some of their losses. You know, let's remember, a mortgage foreclosure, on average, costs the investors about $130 thousand dollars. So, every time we get somebody who gets to stay in their house because they've worked out some arrangement, the investors have not suffered a big hit they otherwise would've suffered. So, bringing those two together ought to happen, even without lots of government dollars in between. Right now, too many of those investors are sitting on the sidelines, saying, "I'm not gonna work with families in foreclosure. I'm gonna wait for the government to come and bail me out because that's really what they want to see."

HINOJOSA: Let's turn now to the issue of executive pay. And there has been a lot of outrage in the past couple of weeks on this issue. In fact, I just read a report that says that Wall Street bonuses will be going up 40 percent—in this year. Let's take a listen.

CLIP: CHARLES GIBSON (ABC NEWS): The twenty largest bailed-out banks received 283 billion dollars in tax payer money and today we learned the executives running those 20 troubled banks still received enormous paychecks.

MSNBC: You can't tell me that 119,000 people on Wall Street just happen to qualify for a quarter of a million dollar bonus here?

REUTERS: REPORTER: Goldman Sachs reported near record third quarter profits and appeared on track to pay bonuses topping the $20 billion mark.

CBS AXELROD: Could the go-go days be back already?

HINOJOSA: So, how is it possible? We were all upset about these big bonuses and all this executive pay. And it's right back—this is like dejavu all over again.

WARREN: Yeah. This one, I have to say, truly amazes me, that these folks who are supposed to be the smartest folks in the room, believe that they can take taxpayer money and save their businesses from complete destruction, and still continue to reward themselves as if—they had earned it all. It's as if they don't understand the world changed when you had to take money from the taxpayers to stay alive.

HINOJOSA: But did the world really change for them?

WARREN: Well, evidently not. And—I think what that means is that we really have to change this one now, again, by statute. I'm sorry, I—I was really a believer. "The market will heal itself, everything will correct here," at least on executive pay. Because no one would be so foolish as to think, "I'll take taxpayer money and then, while people are unemployed, I will lard my—myself with—with pay."

HINOJOSA: So, what are you saying? You—you—you believe that—

WARREN: We've gotta change the executive compensation structure. And it's straight across the board.

HINOJOSA: For every single company across the board?

WARREN: You—you bet.

HINOJOSA: But when you look at Goldman Sachs, for example, they did pay back the Tarp money. So, what responsibility do we have, what authority do we have to go in and say, "You need to check out your executive pay and lower it"?

WARREN: They paid back the Tarp money, but they're still operating with government guarantees. They still are counting on the taxpayer to back stop them. And I believe that gives the taxpayer a seat at the table in decision making over executive compensation. It's our money. The key has to be that congress needs to rewrite all of the rules on executive compensation. And we need a special set of rules for any company that's relying on any kind of taxpayer back stop.

HINOJOSA: And the hands are gonna go up and say, "Oh, my god, they're controlling executive pay. This is—we're going down the tubes in America."

WARREN: They're saying, "You might cut us off from our taxpayer subsidies." And, you know, that just breaks my heart.

HINOJOSA: Okay. But—but if they're saying, "Look this is capitalism."

WARREN: No, this is not capitalism. That's the whole point. This is socialism. This is the part where they're using taxpayer guarantees and taxpayer support in order to eek out some kind of private gain. And this is just wrong.

HINOJOSA: So, it's—it's socialism for—socialism for rich people?

WARREN: For rich people. And, you know, I just gotta say I'm tired of that one.

HINOJOSA: All right, let's talk about the credit rating agencies, which a lot of Americans also thought kind of had their best interest at hand. But, in fact, we reported on the fact that they perhaps contributed a lot to this crisis.

CLIP: STIGLITZ: Effectively they were practicing what I call financial alchemy. Alchemy in the middle ages believed that you could convert base metals like lead into gold. They were doing the same thing.

HINOJOSA: So how is it that conservative investors were willing to buy bonds created from risky sub prime mortgages?

PARTNOY: The answer is credit ratings. The reason they were willing to take these hot potatoes was that the credit rating agencies had said that they're rated Triple A. They're rated Double A. These are highly rated instruments. They weren't hot potatoes. Or at least they didn't look like they were hot potatoes.

STIGLITZ: The rating agency said, "No, don't worry. These are perfectly safe. We used our fancy, complicated models, and we can certify that these are safe enough to be put in your portfolios."

HINOJOSA: Turns out they weren't. Those triple A rated CDO's are now considered central to the global financial crisis.
One year later now, are these credit rating agencies doing the right thing?

WARREN: The rules are the same. Nothing has changed. The laws have not changed. They continue to run their credit rating agencies in the way that they believe will best enhance their own profits and revenues. You—you have to change the rules of the road. I mean, markets work, capitalism works with a set of underlying rules. We can make this system work with regulation. I'm not somebody who—who believes it's time to throw the whole thing out. But regulation has gotta support it. And the way it supports it, is it increases transparency in the system, it increases honesty in the system, it increases accountability in the system. When you get those things, there's plenty of room to make profits. There's plenty of room to be rich. I'm all for that. But it's gotta be profits that were made honestly. It's gotta be profits that came from bringing something new and valuable to the marketplace, not just figuring out the newest trick.

HINOJOSA: And when you say that, I just keep saying, "Well, what do you wanna—what needs to happen Elizabeth?" What needs to—I mean, do Americans need to take to the streets and say, "Change the regulations and change the rules"? Is that really gonna happen?

WARREN: You know, I—I hate to say it. I know something like regulatory reform sounds so boring that I may fall asleep when I say it. But the reality is, congress is about to write the rules of our economic system that will guide us for the next 50 years. If they get it right, we're good. If they get it wrong, the country we knew will be gone.

HINOJOSA: And so, what do you want our viewers—what should they be doing?

WARREN: They need to be on their—representatives in congress, their senators. This is democracy. And if we, the people, don't insist that those—who are in Washington, represent us, then they'll go back to the same rules that benefit the same large financial institutions. And frankly, at that point, then we're all just working for the big banks.

HINOJOSA: As we speak, this is one year later. And it seems like we could've been having this same conversation a year ago did we absolutely miss the opportunity to do what you keep saying, change, fundamental change in how our economy runs?

WARREN: If you're asking me, "Is all hope lost?" The answer is no. Right now, congress has finally stepped up, and is taking this up. They are—they're ready. They're starting to act. Now, Wall Street is back in business, and boy are the lobbyists in business. They are thundering through Washington—in numbers that we've never seen before. So, yeah, it's gonna be a tougher lift right now than it would have been six months ago. But that doesn't change the reality. And that is, congress is moving and they are going to write a new set of rules. The only question is, will those rules be written to benefit ordinary, hard-working American families, what I think of as the real economy? Or will those rules be written to benefit a handful of giant financial institutions?

HINOJOSA: Well, hope for the best. But thank you so much, Elizabeth Warren.

WARREN: Thank you.

BRANCACCIO: Just this week we got a look at one new way of crafting those rules, the chairman of the senate banking committee, Christopher Dodd, proposed ambitious legislation that would overhaul the financial system... the bill would consolidate the many regulators overseeing banks ... it would impose (new) restraints on complex financial products like derivatives...and it would create a new consumer financial protection agency... but the plan faces heavy opposition from the financial industry. Some moderate and conservative democrats are skeptical and no republicans have signed on.
And that's it for NOW. From New York, I'm David Brancaccio. We'll see you next week.

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