THE FEAR ECONOMY
we must restrain debt, the toxin that
feeds the fear. “The individual savings
rate is at a deficit. The government sav-
ings rate is at a deficit. Everything is op-
erating at a deficit,” says Ira Rheingold,
executive director of the National Asso-
ciation of Consumer Advocates (NACA).
“Long-term, there will be pain for the
consumer. People will have to work
longer and tighten their belts.” There’s
plenty of blame to go around for the fix
we’re in, Bill Gross adds: “The institu-
tions that lent the money should have
known better. The people who took the
loans basically must have known that
they really couldn’t afford them. Federal
regulators didn’t do their jobs in terms of
regulating the entire situation.”
Consumer advocates such as Eliza-
beth Warren have been calling for new
regulations to rein in lenders for years.
the financial system by introducing new
consumer protections and imposing
stricter regulations on lending. First up
for President Obama and Congress may
be a credit card holder’s “bill of rights”
that would outlaw universal default—
the gimmick that nearly bankrupted
Angela Wilson—and make credit agreements more understandable. That legislation stalled early last fall, but
Democratic leaders have promised to
bring it to a vote in 2009.
Also high on consumer advocates’
agenda is repeal of the bankruptcy-reform act of 2005, which passed with
overwhelming bipartisan (and lender)
support. By restricting eligibility for a
bankruptcy that fully discharges debts,
“Congress made it harder for families to
get a fresh start, and less risky for lenders
to target those already living on the
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dled and sold them to investors around
the globe—bad debt has not only infect-
ed banks and insurers but also has hurt
any enterprise that relies on a healthy
trade in debt—
your municipality,
your pension fund,
and companies
of all kinds. And
while the amount
of bad debt has
been estimated at
a monstrous $2
trillion, the real
number won’t be
known for years.
Consumer “fear is
well founded,”
says Warren, who in 2007 became rattled
enough to withdraw most of her and her
husband’s savings from the stock market.
“But that fear costs us a lot.”
Perhaps no president understood
the power of fear better than Franklin
Roosevelt at his first inaugural. “If I read
the temper of our people correctly,” he
said on that cold March day in 1933, “we
now realize as we have never realized be-
fore our interdependence on each other;
that we can not merely take but we must
give as well.” Ultimately, Roosevelt
buried his beast not by bailing out the
banks themselves but by creating sweep-
ing new protections for their cus-
tomers—in other words, by restoring
confidence. President Obama and
Congress will both feel extraordinary
pressure to move quickly and do the
same. Understanding, as Roosevelt did,
that we’re all in this together would be a
good place to start.
“You can’t buy a toaster in America that
has a one-in-five chance of bursting in
flames,” she observes. “But someone
can sell you a mortgage they know has a
one-in-five chance of your losing your
home—and they don’t have to tell you.
It’s a market that simply doesn’t work.”
Last fall both presidential candidates
promised to rebuild our confidence in
edge,” NACA’s Rheingold says. Lenders
knew borrowers would have a harder
time wriggling off the hook, which left
the lenders free to offer low teaser rates
that seduced the naive, and “liar loans”
that made it easy for borrowers to mis-
represent their incomes.
James D. Scurlock is the author of Maxed
Out: Hard Times in the Age of Easy Credit
(Scribner, 2007), winner of the Ridenhour
Book Prize, and director of the documentary
of the same name. King Larry, his biography
of Larry Hillblom, founder of DHL, will be
published this summer.
Additional reporting by Rachel Katz and
Walecia Konrad.
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ILLUS TRATION BY S TEVE SANFORD
