October 28, 2019 • 34 mins
The Wall Street Journal headline reads: “Families Go Deep in Debt to Stay in the Middle Class.” In the article, we meet several responsible, educated, well-employed families who are making nearly $150,000 a year… yet going deeper into debt with every paycheck. With, it seems, no way out. This is scary because it’s true, it’s widespread, it’s fundamentally disempowering for families, and it’s only going to get worse. For the last two decades, incomes have been pretty much stagnant. Over the same period of time, the average cost of cars, college tuition, health care expenditures, child care, and housing prices have swelled at an alarming rate. In order to bridge this widening gap between earning and costs, the middle class has turned to that knight in not-so-shining armor… financing. Borrowing. DEBT. In this episode, Bethany talks with Ken Brown, the reporter on this WSJ story that has gotten such a huge response.
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Episode Transcript
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Speaker 1 (00:00):
I'm Bethany McLean and this is making a killing interviews,
exploring the headlines you thought you understood and finding the
lessons we can all learn from them. Already in this series,
I've spoken with Sahel Patel about Netflix, Mike Isaac about Uber,
and Peter Robeson about Boeing. I'm at Bethany mac twelve
on Twitter. Families go deep in debt to stay in
(00:23):
the middle class, reads the Wall Street Journal headline. In
the article, we meet several responsible, educated, employed families who
are making nearly one hundred and fifty thousand dollars a year,
yet going deeper into debt with every paycheck. It sends
a chill down my spine because it's true, it's widespread,
and it might get worse. Here's what's going on. For
(00:44):
the last two decades. Incomes have been pretty much stagnant.
Over the same period of time, the average cost of cars,
college tuition, healthcare expenditures, childcare, and housing have swelled at
an alarming rate. In order to bridge this widening gap
between earnings and costs, the middle classes turned to that
night and not so shining armor debt, filling the gap
(01:06):
between earning and spending is an explosion of finance into
nearly every corner of the consumer economy. Is how the
Journal put it. Consumer debt, not counting mortgages, has climbed
to four trillion dollars, higher than it has ever been,
even after adjusting for inflation. According to the Journal, our
appetite for debt has been fueled by a decade of
super low interest rates engineered by the Federal Reserve after
(01:29):
the last financial crisis, interest rates that by design made
it easier for us to spend and made the classic
American middle class dream seem affordable. But of course, debt
is a double edged sword. Yes, borrowing can spur spending
in economic growth, but if borrowers can't repay, our collective
pile of debt may turn into a dangerous economic landslide.
(01:50):
There isn't much room for the low interest rates that
have facilitated all of this to go any lower, and
Federal Reserve data shows that the proportion of credit card
balances that are seriously passed due is already on the rise.
What will happen if the economy heads into a recession?
The step bomb we are all sitting on raises a
whole host of societal questions too, most of all, what
(02:11):
does this mean for the beleaguered middle class? Here to
help us answer these questions, and mores Ken Brown one
of the three reporters on this Wall Street Journal piece
that has gotten such a huge response. So, Ken, you've
been thinking about debt for a long time. What made
the Wall Street Journal tackle this particular topic. Now you
look at the economy, which has done pretty well the
past bunch of years, and then you look at how
(02:32):
people feel about the economy, and it's not great. There's
been this sort of unease out there, and so we
were just trying to figure out why, you know, unemployment
so low incomes her up decently and we're trying to
figure out why. And when you look at the costs
of being middle class, what people expect when you make
one hundred and twenty thousand dollars a year, one hundred
twenty thousand dollars a year is twice the median household
(02:55):
income in the US, and so when you make one
hundred twenty thousand, you feel like you should be middle class.
And when you talk to people who feel like that,
they can't make it, and so they end up the
bottom is falling out somehow right, and so they can't
afford a middle class lifestyle a house, two cars, college
for the kids, etc. And so we were trying to
(03:16):
understand why there was this unease. What surprised you the
most in looking into this when you look at consumer
debt it's low, like debt to income levels and all
that stuff has come down a ton since the financial crisis.
And you scratch your head because you're like, well, wait
a minute, people don't feel they're not acting like that.
And then you start to look at it and you say, well, okay,
(03:37):
the reason debts down it's because mortgage debt is down
so much. Mortgage that is down so much because there
was so many defaults, and because interest rates so low.
Then you look at student debt, auto debt, credit card debt,
it's all at record highs and even if you adjust
for inflation, and so what you realize is people are
not buying homes like they were, but they're borrowing for
(03:57):
everyday things. They're borrowing more than they would have in
the past to buy a car, they're borrowing in their
credit cards. Student debt, we all know, is up a
ton in the past decade. And someone that's weighing on people.
So the data is very compelling once you peel back
a little bit of the overall debt data and you
look at these areas like credit card debt or auto loans.
(04:20):
The average car new car in the US cost thirty
seven thousand dollars. The median household income is sixty one
thousand dollars. Yeah, the median household incomes. They're not buying
a new car every year. But the reason that works
is because there's been this explosion of auto debt, and
so auto loans are bigger than ever, they're longer than ever.
And one of the trends we wrote about is people
(04:42):
don't pay off that car loan. People roll the old
car loan into a new car loan and basically keep
paying it off. When you look at the surface number,
it tells you one thing, and you look underneath and
it's an entirely different picture. Before we get back to
breaking down the numbers, what did you hear from the
people that you talked to? Did you hear unease, frustration?
What was the predominant emotion that came through? Yeah, well, anxiety, fear.
(05:07):
It's worse than that, you know. So the stories repeat themselves.
To some extent, we talk to people in that one
hundred two hundred and fifty thousand dollars income range because
we wanted to talk to It's not necessarily the middle
class statistically, but these are people who've done well right.
These are people who should be okay, and they fall
into two categories. One category is student debt. So a
(05:28):
bunch of people graduated school would say fifty thousand dollars
in debt, thirty thousand dollars in debt, and they just
can't catch up because they're making their debt payments. Maybe
they have a mortgage, maybe they have a car payment,
and they just can't get ahead. And so while in
the past, you know, most people didn't have a lot
of debt when they were young, and then they would
(05:49):
take on a house, they'd get a car loan, and
the debt would build up, these people are starting out
with debt and so then it just builds on itself
and they can't get out from under. The other group
that we run into, there's people who've had unexpected expenses,
so they have their student debt, or they have a
car loan and they have a mortgage or something, and
(06:10):
they get hit with something a healthcare costs, erect car,
something like that, and it just tips them over the
edge and again they can't catch up. Let's break down
each of those categories a bet. Why when you look
at auto debt, why has it exploded so much? What's
the primary reason for that? Our car is more expensive
than we used to. Are we buying more expensive cars
than we need? Yeah, so cars are more expensive. So
(06:31):
the average new car in the US thirty seven thousand dollars,
and the price has gone up steadily over the past
bunch of years. And part of it is people want SUVs.
People want again the trappings of a middle class lifestyle.
I have a couple of kids. Everyone around me has
an suv. Whether you agree that they should buying an
(06:52):
suv or not, that's what people are buying, and so
that's why the prices have gone up. The auto industry
has feasted on this stuff. Auto sales have been up
until last year, we had the best four year stretch
of auto sales ever in the history, and a lot
of it was driven by this consumer debt. So thirty
two percent of new car loans are now six to
seven years long. So in the past, the typical new
(07:13):
car loan was three to five years, and then you'd
have the car for a few years and you without
car loans. I mean we all remember, right, you paid
down the car loan and you had the car and
you didn't have that monthly payment. It was like a
great time, and then you hoped the car would last. Well,
now there's six or seven years long, and people don't
even pay them down. I mean, first they roll over
the old debt into a new loan. The second thing
(07:35):
is car leases is the cheapest way to own a car,
although you don't really own it. The cheapest way to
get a car in terms of monthly payments is to lease.
And leases used to account for about ten percent of
car sales and now it's about a third. And so
again people don't have the cash, and so everything is
termed out. Everything is paid over longer periods. With leases,
(07:56):
you kind of pay forever. Right, you have a lease,
you go to the next lease, you go to the
next lease. I actually never thought about that, and it's
really interesting that combination, whether you lease or whether you
have a loan, that you now pay back over a
much longer period of time. Both me and you never
have a period in your life where you're not making
that payment, right, it's there every single month, right, right,
And so it's kind of interesting. And you know, you
(08:18):
talk to car dealers, which we did, they make more
money from the financing of a car than they do
from the sale of a car. Everyone knows. You walk
into a car dealer, you pretty much know, you have
all these services on your phone. You pretty much know
what you should be paying roughly for a car. And
you know, these guys can do their song and dance,
but you can you can kind of look and see
what you should be paying. Then you go into the
(08:39):
finance office of the dealership and then they get you
into this loan and it's longer term, and it has
all these bells and whistles, and the dealer makes more
money because they all sell on these loans. They make
more money on the loan they do on the car. Wow.
And are you hearing when you go and talk to
dealers about this, are you hearing any worries from them?
(08:59):
Or are they all excited? Did they think this is
an unqualified good thing or do they say, oh, maybe
this poses a danger does in the future. They say
two things. One is we serve our customers. They want
to buy these cars. We're going to get them into
this car. You know, you get a customer walks in
the door with a car with a five thousand dollars
balance on the loan and they want a new car.
We're going to get them into that car, they say that,
(09:20):
And so they they're very short term oriented. They want
to make the sale. They're quarter to quarter. These guys
do not think about the financial health of their customers.
Like a mortgage broker in two thousands. They don't own
the loan, right The loan goes to carlanders. And it's interesting,
so you mentioned mortgage crisis, so we all know all
these mortgages went bad and banks got crushed, right, Well,
(09:42):
back then, car loans didn't go bad. I mean some did,
but not nearly to that extent. And one reason is
because consumers, if you lose your house, you go to
rent somewhere and you have a place to live. For
most people, you can't get to work without a car.
So the last thing you're not going to pay off
as a car loan. And the people who don't don't
pay off the car loan, they repossessed a car. And
so it was a low risk form a lending. So
(10:04):
there's been a ton of money pouring into car lending
since the financial crisis because it was seen as a
good bet. Because of course, what was seen as a
good bet last time has to be a good bet
this time around, exactly. And also it's low interest rights.
It's hard to make a return on your money, and
so car lending is a pretty good way to make
a return, especially for people with low credit. And you said,
they said two things, So what's the other thing the
(10:26):
dealers told you. The other thing is these people want SUVs,
will give them SUVs they want. You know, they can
be irresponsible with their money, but you know it's not
our job to judge them. Did you think it with
the people you talked to were making irresponsible decisions or
did you see them more being backed into a corner
where they didn't have all that much choice. It's usually
(10:46):
a combination. I mean, so sometimes people spend too much
on a car, Sometimes people ran up credit card bills,
and sometimes they had unexpected expenses and they thought, wow,
I one hundred and forty thousand dollars a year, I
can afford all this stuff. So we got a ton
of response on the story, and a lot of it was,
(11:09):
these people are responsible when I grew up, when I
went to college where I didn't borrow, We didn't borrow
back then. Oh he's these answers. And my response to
those people was, look, first of all, for the people
who grew up twenty thirty years ago, the amount of
credit available today is far bigger than the amount of
credit that was available back then. I mean, people didn't
(11:30):
have lots of credit cards. Car Loans were harder to get,
there were no leases. It's credited. I'm thinking of that.
Ask our wild quote. Most morality is only the lack
of opportunity, maybe in most debt free lifestyles, or only
the lack of credit. Yeah, exactly, exactly. So that's one thing.
The other thing is it doesn't really matter whether people
are being irresponsible or not. The fact is this debt
(11:54):
level out there in the economy, and so the real
thing that matters is the US economy is driven by
consumer spending. Two thirds of you know, the US economy
is consumer spending, and a big chunk of consumers have
been spending by borrowing. And so two things happen. Either
they reach a limit, you can't keep borrowing, you've maxed
out your credit cards, they won't lend you a more
(12:17):
money for a new car. You know you're maxed out,
or you'll lose your job, or you get a pay cut,
and or you know there's a recession and you can't
pay and you default, right, right, So in both cases
it hurts the economy. And so the biggest point we
try to make is like, you could say what you
want about these people, but you've got to understand that
there is an economic cost to this, and policymakers need
(12:41):
to understand what's going on. And you see in the economy,
So the economy has stayed relatively strong, and you know,
largely because the jobs market has been so great, but
you know, when interest rates went up over the last
couple of years, we saw hired defaults on credit cards,
We saw the housing markets slow down, and so people
(13:01):
very sensitive to debt. They've borrowed a lot, they're very
sensitive to interest rates, and so that's an economic impact.
I hate just make too many analogies to the financial crisis,
although although they're they're right, they're waiting to be made.
But there was such a debate about where borrowers and
the financial crisis irresponsible, right, And in the end it
didn't matter because whether it's a predatory borrower, predatory lender,
if there's debt in the system that can't be paid back,
(13:23):
that's that's a massive problem. Right before we get to
those broader economic questions, I want to come back to this,
the way in which you broke down the categories of
debt and tell me about student debt. Were you It's
it's been a headline, but were you. Were you surprised
by the magnitude of the impact it's had on people's lives.
I knew the numbers. We all know the numbers. You
see the chart going up and up and up and
(13:43):
up and up. But then you talk about the impact
and it just weighs on people. It's just at the
time in your life when you are kind of just
making it. You have a lot of expenses, You've gotten married,
you may start a family, You're you're needing things, you know,
and it's a tough financial times. Everyone has a story
of I was twenty eight years old and I was
(14:05):
down to my last nickel and then something how, you
know whatever. Everyone has that story. But when you have
fifty thousand dollars with the debt sitting on you, especially
like married couples, you know, eighty thousand dollars whatever, you know,
you can't there's no margin for error, and there's no
margin for error meeting either screwing something up, having some
kind of financial surprise, or spending too much going on
(14:26):
a vacation. You know. One of the couples, one of
the families we wrote about, deep in debt, really struggling,
and they were slowly getting their arms around things. One
of the cars got wrecked, so they had to buy
a new car, and then they were invited to three
out of town weddings in a row, so airfare, hotels, gifts.
(14:50):
They have a young child, so they had to get
either childcare or whatever. It was a lot of money.
It was a few thousand dollars, and it went on
the credit cards because there's no other way, and so,
you know, and then credit cards at twenty percent interest
or eighteen percent interest, which they're not paying off anytime soon.
It's tough. Yeah. I thought one of the most pointed
(15:10):
lines in your story it was a quote from one
of the people you talked to, and he said, what
was supposed to be an asset became a liability. And
I think that about education and that seems to me
to have deeper societal ramifications if people are starting to
perceive that this thing, and education is supposed to be
all of our goals, has actually become a liability. Did
that stand out to you in the same way. Yeah,
(15:31):
I mean people didn't regret their education. They regretted going
to private colleges, They regretted maybe not working while they
were in school, they regretted taking on so much debt,
and they didn't understand it. But again, like when you're
eighteen nineteen years old, you don't understand it. And it's
also interesting you go back to the financial crisis. You
(15:53):
look at the rise in student debt and it picks
up when the financial crisis hit. And you talked to
a bunch of experts and they say, look, a lot
of people counted in equity in their homes for to
pay for college tuition because the home was a piggy
bank in the two thousands. Everyone that fascinating connection ten
(16:14):
or twenty percent a year. And so you know, you
had yourself one hundred thousand dollars in equity in a
home or whatever, fifty thousand and that was going to
help pay for college. Once that equity got wiped out
and you couldn't borrow against your house, it was tough,
and so parents took on student debt and kids took
on student debt, and so it's sort of this lingering
echo of the financial crisis, and it just left people
(16:37):
vulnerable and it's plays out. I had not thought about that,
about the connection between the rise and student loan debt
and the financial crisis. And what's interesting is that it's
a vicious circle, isn't it. Because you have a lack
of home equity means that people have to pay outright
for education where they might have been able to finance
it with borrowing on their home. And then because people
have so much student loan debt, they're not able to
(16:59):
buy homes right. And so so this one of the
odd components in here is mortgage debt. Right, And were
there surprises for you and what you saw on the
picture and mortgage debt? People still want to buy homes
the people we talk to. The statistics don't really bear
that out. I mean, we've seen a decline in home
ownership from the peak, but but people we talked, we
(17:19):
still want to buy homes. They feel like it is
what a middle class family should do. But one of
the things that we have written about, and we'll write
about more, is there's been this big rise in the
rent rentals of single family homes. So typically people rent
apartments and condos and they own homes, and the economics
(17:42):
of trying to rent homes at scale rent a thousand
homes has always been really hard. But a bunch of
folks brought up homes post financial crisis, big investors, and
they have them and they've been very popular. And the
people who rent these homes say, listen, our people make
one hundred thousand dollars a year. Our tenants make one
hundred thousand dollars. You they're not poor people, but they
(18:03):
have no assets. They have debt. You know, when you
add up I own X, Y and Z, and I
have X, Y and Z debt and it nets out
to zero or only a little bit, and so they
don't have the money to put down. We talk to
a guy at the Federal Reserve who studies this stuff,
and he said, you know, buying a home for the
average person in the average city is becoming a luxury.
(18:25):
It's really a luxury and that is a difference from
the past. I thought it was stunning. I had no
idea that Blackstone, the big private equity firm, is now
the largest renter of single family homes. That it's really interesting.
I thought, I've I've done a fair amount of work
on housing, and someone said to me about our broken
homeownership policy. Let them meet rent. And you think about
(18:47):
that now, because in the end, right this has huge ramifications,
and that it's people's homes that paid for them to
retire often, and so what's the spillover effect of a
nation of renters who with no assets. One element of
this story is income inequality, right, and wealth disparity, and
they go hand in hand, but just on the wealth side.
(19:10):
So people accumulate wealth basically in two ways. For the
average person, One is they invest in the stock market,
bond market, you know, whatever. And one is their own
real estate and stocks and bonds and all that are
basically the vast majority are owned by the wealthiest people
top ten percent own a huge amount of securities, and
(19:34):
real estate is owned by the middle class. And so
wealth creation for the middle class is depended on real estate.
And you go back to post World War two, for
sort of. The three decades after World War Two, real
estate prices were up and the middle class did really well,
and wealth gap, the wealth gap in the US was
pretty was relatively small. You go back to more recent years,
(19:58):
the stock market has done much better than housing, and
there's been this gap. Now, this is a complicated story.
I don't want to oversimplify. Well, that's fascinating. When you
don't own a house, you lose that opportunity both for
force savings you're paying down your mortgage and your accumulating
equity in the house and appreciation of the asset. And
that's how middle class people have made money maybe just
(20:19):
like you said, made their retirement for decades. And so
if you don't own anything, it's tough to build that up.
And the problem is the debt that's gone up. Student loans,
car loans, credit card doesn't help you accumulate wealth. I
mean student loans arguably, arguably because you make a higher income.
And so yes, that that is. But a mortgage is different.
(20:41):
A mortgage. I mean, if you think about it, even
if you take on a big mortgage and you work
hard to pay it off and you even get in
over your head someone if you can stick with it.
You have this house happy set, right, And the house
is for most people, if you're law own it long enough,
gone up in value, and these other things don't do that,
and so it widens the wealth gap. And that's been
(21:02):
a political issue and an economic issue. So another component
of this that I found really interesting was the way
in which unsecured personal loans are also exploding. And that's
got a couple of components, right, It's it's one tells
a picture of what's going on with people, but it
also tells a picture of this or paints a picture
of this ferocious competition between traditional lenders and new upstart lenders. Right,
(21:24):
And how how did you guys think about that? Again,
interest rate to low, it's hard to make a return.
And one way you can make a nice, sweet return
is lending to consumers because they pay higher interest rates
until of course they don't pay at all, Right, And
so that's the risk you take, and everyone seems to
think that that's a good risk. The problem is, as
we know, and there's a lot of competition, people make
(21:47):
bad decisions, The lenders make bad decisions, and so you
have these Silicon Valley financed lenders fintech lenders. You have
golden sacks champions, right. I mean it's interesting and they
want to build a deposit base. I have no idea
how that's going to play out for them. And then
all these banks pulled back on personal lending post financial
(22:09):
crisis because it's risky. It's the first thing you don't
pay off, right, you know it's insecure. What are they
going to do to me? And so you don't pay
it's a credit card, right, And they're all doing it again.
So's you know, a lot of people trying to find
that market. Did you in talking to people for this,
did anybody voice worry about what happens if the recession
(22:30):
everybody's looking for hits. The whole premise that people lend
and borrow in these markets in these times is they're optimistic.
I mean, you don't lend to someone if you're pessimistic, right,
and you don't borrow if you're pessimistic. So everyone is
optimistic that they'll have a job, that wages will be solid,
that the borrowers will pay things off. And so it's
(22:53):
an assumption. And people have made a lot of money
being positive and optimistic, right, And people have lost a
lot of money being up positive and optimistic, and we
don't know what's how it's going to happen. But when
you have ten years of economic growth, that's the time
when people get sloppy. Right. Historically people do stupid things
when they have things have been good for a long time.
(23:13):
And so I'm not saying people are doing stupid things.
But you know, what's interesting, as you point out, though,
is how different the mood feels than it did. You know,
in two thousand and five, two thousand and six, it
felt a bulliant, right, and now we've ten years into
this supposed, you know, economic growth, and it doesn't feel
a bulliant and it's just it's it's really interesting contrast
(23:34):
when you think back on how just how the mood
of the country feels. And that was one of the
reasons we originally got into the story, was like, some
doesn't quite add up. People are feeling nervous, people have
I don't want to say they've been cautious, but there's
just there's not that ebulence that we saw before from consumers.
And I'd like to think we kind of try to
(23:55):
sort that out a little bit and explain that definitely.
Do you think it's eyes the hands of the Federal
Reserve a little bit. I mean, there's an immense amount
of controversy surrounding FED Chairman, your own Powell. Now, right,
we've had these low interest rates, totally ahistorical for a
longer period of time than anybody would ever have imagined.
There's no room for them to go lower. But can
(24:16):
they go higher? When you think of what that would
mean for all of these households that you profiled, it
would be very hard for them to go higher. The
good thing in the US is mortgages are mostly fixed rate,
and so that wouldn't hurt so bad. But you know,
credit cards, auto loans, either they adjust or people know
that I'm they're going to have to borrow to get
a car in the next two years, and so they're cautious.
(24:37):
It makes people cautious. And we saw it, you some
evidence last year that the interest rate increases were biting.
I don't know that the consumers were the big reason
why the economy is slowing and the FED is cutting rates,
but it's certainly a factor. And the idea that they're
gonna be able to get rates back to four percent
five percent, right, shocking, right? Not alone the ten and
fifteen percent, and that our parents grew up and can
(24:59):
you imagine, So you had a line in the story
that maybe this is a vote of confidence in the future.
That may be borrowing as a sign of confidence in
the future. Do you believe that most people will borrow
if they feel that they can pay it back, and
so it is a sign of confidence. It may be
a misplaced sign of confidence. People may be over confident
about how things are. Look we all know from psychology,
(25:19):
you know, people extrapolate what they've seen in the recent
past into the future, right, And so if the economy
has been good, people think it's going to stay good.
If the stock market's been down, everyone thinks it's going
to keep going down. So it's human nature, and I
think it is a vote of confidence. It just may
be misplaced, right, Although it's also another way to look
at that, and this is not my thought, I don't
remember who said it, but that we've become a nation
(25:42):
of basically interest expense rather than rather than principle. So
we look at can we pay the interest, We don't
think about paying back the principle. And then that would
play into your idea that it isn't really that if
it's a misplaced vote of confidence because we're not thinking
in terms of the principle. We've been taught for so
long to think in terms of the interest, right, No,
I think you're absolutely right. I mean, look, so I
mean internally, recall this story and some of the other
(26:03):
stories you've done. Rent or nation. So you don't own
a house. You rent a house. You don't own a car,
your Lisa car. You don't even buy your phone, right,
you pay No one buys a phone, you know, you
pay it twenty five dollars thirty dollars a month, right
for two years, and then you get another phone, so
you're always paying your phone. So no one owns anything
anymore in the middle class. And that's an exaggeration, of course,
but the mentality, just like you said, the mentality changes,
(26:26):
so like, Okay, what's my monthly payment, what's my monthly income?
Can I do this? There's no thought of do I
want to put away fifty thousand dollars for a down
payment on a house? Do I want to put money
away from my kids college? So I want to, you know,
like really save and think about the future and think
about assets. It's just cash flow. It's just in and out.
(26:46):
Another example of short termism. Right, So the politicians are
talking about many of the Democratic candidates are talking about
student loan forgiveness. Is that just a small piece of
the puzzle as you think about this array of debts
bread in front of us. Student debt is a trillion
and a half bucks. I think it's a big piece
of the puzzle because it would take a burden off
(27:08):
of the middle class, which would then they would be
more money left for them to spend and save and invest.
I think it would be a real game changer for
people who really are looking at it a decade of
student loan payments in the years where they should be
starting to accumulate assets and things like that. Does that,
(27:30):
in and of itself have the power to start reversing
this trend toward renter nation? Do you think or do
you think there are other things that would need to
be done concurrently? I think it would go part of
the way to reversing that. I mean, I think someone
who has fifty thousand dollars in student loan debt, I
think would be happy to take on more debt to
own a house and see something for it. I mean,
(27:53):
student loan debt is also this weird thing. When you're
paying off a mortgage, you're living in the house, When
you're paying off a car, you're driving the car to loan.
That is like I finished school five years ago, I'm
still paying for it. It's like a It's just a
bad way. And of course you're benefiting taxiological, you're benefiting
from the education you got, hopefully with the job you
have and the income you have. But it's a hard
(28:14):
thing and it just is. It weighs on people. And
the one thing I'd say is the impact would probably
be not as great as the optimists or as the
people promoting it think, because the reality is a lot
of people are not paying off the student debt. There's
a big default rate, or people are just behind, and
then a lot of it is in deferments because people
(28:35):
are still in school or whatever. And so the big
number that people always read is really not the amount
that's getting paid off. It's a much smaller numbers. So
the economic impact would probably be small. It would make
it would ease a huge psychological burden, but it would
make less of a difference in people's monthly cash lot
than than you might expect. Isn't part of the problem too,
(28:55):
that student loan debt that if you if you don't
pay your loans, they can even come after your Social
Security money later on. I mean, it just has so
many reverberations. What's really tough is you can get rid
of it in bankruptcy. And so, you know, the great
thing about US bankruptcy law had been, you know, in
a year's past, it gave people a fresh start. It
was awful, but it gave you a fresh start. Now
(29:15):
the laws have gotten much tougher and it's gotten much
harder to declare bankruptcy, but it's still a way out
for people. And you know, you can't get everybody student
debt in bankruptcy, and so it's this burden that you
carry with you. So did you, in thinking as you
reported this piece and wrote it in the other pieces
you've done, did you think, wow, we just need a
radical rethink of how we all live and of economic
(29:38):
policy or did you sort of shrug your shoulders at it?
What was what was your response? I think we're going
to have to address it because at some point, people
with this level of debt will reach a limit of
borrowing and that's going to hit the economy, and the
economy is dependent on contumer spending, and if consumers are
not spending, the economy really slows down. And that that's
(30:00):
that's sort of the thing that's sitting out there. I
think that's it's a hugely frightening issue lurking over all
of this, Right, And it's a double whammy in a sense,
because not only does consumer spending slow down, then you
have bankruptcies at the same time. Right, that then further slowdown.
It will provoke a vicious circle. In other words, Right,
what do you make of the fact that this isn't
just a US issue? You spent a lot of time
(30:22):
in Asia and you led a twenty thirteen series entitled
China's Rising Risks, which highlight highlighted the potential problems called
by China's China's rapidly rising debtload in the Journal just
did a front page story about the rise in debt
in China. Why is that and what does it mean
that this isn't just a US issue? China is fascinating
and the Chinese economy as a whole. You can have
a whole discussion about it. But Chinese economy has been
(30:45):
very debt dependent for a long time now. And at
first it was Chinese companies that were borrowing and Chinese
real estate developers that were borrowing, but more recently Chinese
consumers have been borrowing, particularly young consumers. The Chinese have
always been great savers, partially because frankly, it's been a
tough place to live for many decades, and people saved
(31:06):
because they had to. You talk to people who are
you know, middle age and older in China and they
are like, they save every yuan and they invested in
real estate, they keep it in the bank whatever. Young
people have not done that, and they've been spending every
dollar they get. And you know, one of the parallels
with the US is it's very easy to borrow in
China now. I mean it was not easy to borrow
(31:28):
in China a decade ago. As short as a decade ago, really,
people didn't have credit cards people, you know it. It
was a cash economy. And now it's an electronic payments
economy and you borrow on your phone small amounts very simply.
And some of that spending is on goods from American companies. Right.
So there's also one of the downsides of a global world.
(31:51):
Is that there's a potential for a boomerang effect there, right, sure,
I mean, you know, China is a huge market and
companies Apple, Nike, you know, all these companies have done
well there, and yeah, some portion of it is debt
and Chinese travel, the amount of Chinese going overseas, I
mean there's a lot of Chinese, you know, and even
when a small number goes overseas makes a big impact.
(32:12):
And that's helped the US economy and the global economy.
Travel in Europe, Chinese tour groups are everywhere and they're
spending and that's had a big global economic impact. So
we might be headed for a huge rethink all over
the world. It could be Yeah, I mean again, at minimum,
at some point, if people keep borrowing, they reach a
limit on how much they can borrow and how much
they could spend. And that is the thing that sort
(32:34):
of sits out there. And you know it's not only China.
The UK debt levels are very high, Canada debt level
is very high, Australia, same thing. Central banks in all
those places have said, essentially, consumer debt is a big
issue for US. It's hard to raise rates. We really
need to watch that, and so it's it's not just
the US and China. So it's both reassuring and that
(32:56):
it's not just profligate, entitled US citizens, right, but it's
also incredibly frightening because it is global, and that means
there's no place to turn. Well, thank you so much
for all the fantastic work, and thanks for coming to
talk to me. Thank you. As Ken and I talked,
I thought about what's been a theme of this podcast,
which is short termism. Our own short termism is consumers
(33:17):
as we think only about the interest we have to pay,
not about the principle, but also business short termism and
lending to increasingly cash strapped consumers. The former makes me sad,
the latter frankly makes me mad. Will they expect another
bailout when the inevitable recession comes? And a worried little
voice in my head also kept saying something has to
(33:39):
give and soon. The longer term ramifications of what can
called renter nation are ugly. What happens is renter's head
into retirement. I've always been resistant to relying on policymakers,
but the incentives for us and for businesses have to change,
and I think we have to change our behavior. In
any event, the economy, the global economy, is going to
(34:00):
undergo some seismic changes. Making a Killing is the co
production of Pushkin Industries and Chalk and Blade. It's produced
by Ruth Barnes and Rosie Stoffer. My executive producers are
Alison McClain no relation in Making Casey. The executive producer
at Pushkin is Mia Loebell. Engineering by Jason Gambrell and
(34:22):
Jason Rostkowski. Our music is by Jed Flood. Special thanks
to Jacob Weisberg at Pushkin and everyone on the show.
I'm Bethany McLain. Thank you so much for listening. You
can find me on Twitter at Bethany mac twelve and
let me know which episodes you've most enjoyed.
I'm Bethany McLean and this is making a killing interviews,
exploring the headlines you thought you understood and finding the
lessons we can all learn from them. Already in this series,
I've spoken with Sahel Patel about Netflix, Mike Isaac about Uber,
and Peter Robeson about Boeing. I'm at Bethany mac twelve
on Twitter. Families go deep in debt to stay in
(00:23):
the middle class, reads the Wall Street Journal headline. In
the article, we meet several responsible, educated, employed families who
are making nearly one hundred and fifty thousand dollars a year,
yet going deeper into debt with every paycheck. It sends
a chill down my spine because it's true, it's widespread,
and it might get worse. Here's what's going on. For
(00:44):
the last two decades. Incomes have been pretty much stagnant.
Over the same period of time, the average cost of cars,
college tuition, healthcare expenditures, childcare, and housing have swelled at
an alarming rate. In order to bridge this widening gap
between earnings and costs, the middle classes turned to that
night and not so shining armor debt, filling the gap
(01:06):
between earning and spending is an explosion of finance into
nearly every corner of the consumer economy. Is how the
Journal put it. Consumer debt, not counting mortgages, has climbed
to four trillion dollars, higher than it has ever been,
even after adjusting for inflation. According to the Journal, our
appetite for debt has been fueled by a decade of
super low interest rates engineered by the Federal Reserve after
(01:29):
the last financial crisis, interest rates that by design made
it easier for us to spend and made the classic
American middle class dream seem affordable. But of course, debt
is a double edged sword. Yes, borrowing can spur spending
in economic growth, but if borrowers can't repay, our collective
pile of debt may turn into a dangerous economic landslide.
(01:50):
There isn't much room for the low interest rates that
have facilitated all of this to go any lower, and
Federal Reserve data shows that the proportion of credit card
balances that are seriously passed due is already on the rise.
What will happen if the economy heads into a recession?
The step bomb we are all sitting on raises a
whole host of societal questions too, most of all, what
(02:11):
does this mean for the beleaguered middle class? Here to
help us answer these questions, and mores Ken Brown one
of the three reporters on this Wall Street Journal piece
that has gotten such a huge response. So, Ken, you've
been thinking about debt for a long time. What made
the Wall Street Journal tackle this particular topic. Now you
look at the economy, which has done pretty well the
past bunch of years, and then you look at how
(02:32):
people feel about the economy, and it's not great. There's
been this sort of unease out there, and so we
were just trying to figure out why, you know, unemployment
so low incomes her up decently and we're trying to
figure out why. And when you look at the costs
of being middle class, what people expect when you make
one hundred and twenty thousand dollars a year, one hundred
twenty thousand dollars a year is twice the median household
(02:55):
income in the US, and so when you make one
hundred twenty thousand, you feel like you should be middle class.
And when you talk to people who feel like that,
they can't make it, and so they end up the
bottom is falling out somehow right, and so they can't
afford a middle class lifestyle a house, two cars, college
for the kids, etc. And so we were trying to
(03:16):
understand why there was this unease. What surprised you the
most in looking into this when you look at consumer
debt it's low, like debt to income levels and all
that stuff has come down a ton since the financial crisis.
And you scratch your head because you're like, well, wait
a minute, people don't feel they're not acting like that.
And then you start to look at it and you say, well, okay,
(03:37):
the reason debts down it's because mortgage debt is down
so much. Mortgage that is down so much because there
was so many defaults, and because interest rates so low.
Then you look at student debt, auto debt, credit card debt,
it's all at record highs and even if you adjust
for inflation, and so what you realize is people are
not buying homes like they were, but they're borrowing for
(03:57):
everyday things. They're borrowing more than they would have in
the past to buy a car, they're borrowing in their
credit cards. Student debt, we all know, is up a
ton in the past decade. And someone that's weighing on people.
So the data is very compelling once you peel back
a little bit of the overall debt data and you
look at these areas like credit card debt or auto loans.
(04:20):
The average car new car in the US cost thirty
seven thousand dollars. The median household income is sixty one
thousand dollars. Yeah, the median household incomes. They're not buying
a new car every year. But the reason that works
is because there's been this explosion of auto debt, and
so auto loans are bigger than ever, they're longer than ever.
And one of the trends we wrote about is people
(04:42):
don't pay off that car loan. People roll the old
car loan into a new car loan and basically keep
paying it off. When you look at the surface number,
it tells you one thing, and you look underneath and
it's an entirely different picture. Before we get back to
breaking down the numbers, what did you hear from the
people that you talked to? Did you hear unease, frustration?
What was the predominant emotion that came through? Yeah, well, anxiety, fear.
(05:07):
It's worse than that, you know. So the stories repeat themselves.
To some extent, we talk to people in that one
hundred two hundred and fifty thousand dollars income range because
we wanted to talk to It's not necessarily the middle
class statistically, but these are people who've done well right.
These are people who should be okay, and they fall
into two categories. One category is student debt. So a
(05:28):
bunch of people graduated school would say fifty thousand dollars
in debt, thirty thousand dollars in debt, and they just
can't catch up because they're making their debt payments. Maybe
they have a mortgage, maybe they have a car payment,
and they just can't get ahead. And so while in
the past, you know, most people didn't have a lot
of debt when they were young, and then they would
(05:49):
take on a house, they'd get a car loan, and
the debt would build up, these people are starting out
with debt and so then it just builds on itself
and they can't get out from under. The other group
that we run into, there's people who've had unexpected expenses,
so they have their student debt, or they have a
car loan and they have a mortgage or something, and
(06:10):
they get hit with something a healthcare costs, erect car,
something like that, and it just tips them over the
edge and again they can't catch up. Let's break down
each of those categories a bet. Why when you look
at auto debt, why has it exploded so much? What's
the primary reason for that? Our car is more expensive
than we used to. Are we buying more expensive cars
than we need? Yeah, so cars are more expensive. So
(06:31):
the average new car in the US thirty seven thousand dollars,
and the price has gone up steadily over the past
bunch of years. And part of it is people want SUVs.
People want again the trappings of a middle class lifestyle.
I have a couple of kids. Everyone around me has
an suv. Whether you agree that they should buying an
(06:52):
suv or not, that's what people are buying, and so
that's why the prices have gone up. The auto industry
has feasted on this stuff. Auto sales have been up
until last year, we had the best four year stretch
of auto sales ever in the history, and a lot
of it was driven by this consumer debt. So thirty
two percent of new car loans are now six to
seven years long. So in the past, the typical new
(07:13):
car loan was three to five years, and then you'd
have the car for a few years and you without
car loans. I mean we all remember, right, you paid
down the car loan and you had the car and
you didn't have that monthly payment. It was like a
great time, and then you hoped the car would last. Well,
now there's six or seven years long, and people don't
even pay them down. I mean, first they roll over
the old debt into a new loan. The second thing
(07:35):
is car leases is the cheapest way to own a car,
although you don't really own it. The cheapest way to
get a car in terms of monthly payments is to lease.
And leases used to account for about ten percent of
car sales and now it's about a third. And so
again people don't have the cash, and so everything is
termed out. Everything is paid over longer periods. With leases,
(07:56):
you kind of pay forever. Right, you have a lease,
you go to the next lease, you go to the
next lease. I actually never thought about that, and it's
really interesting that combination, whether you lease or whether you
have a loan, that you now pay back over a
much longer period of time. Both me and you never
have a period in your life where you're not making
that payment, right, it's there every single month, right, right,
And so it's kind of interesting. And you know, you
(08:18):
talk to car dealers, which we did, they make more
money from the financing of a car than they do
from the sale of a car. Everyone knows. You walk
into a car dealer, you pretty much know, you have
all these services on your phone. You pretty much know
what you should be paying roughly for a car. And
you know, these guys can do their song and dance,
but you can you can kind of look and see
what you should be paying. Then you go into the
(08:39):
finance office of the dealership and then they get you
into this loan and it's longer term, and it has
all these bells and whistles, and the dealer makes more
money because they all sell on these loans. They make
more money on the loan they do on the car. Wow.
And are you hearing when you go and talk to
dealers about this, are you hearing any worries from them?
(08:59):
Or are they all excited? Did they think this is
an unqualified good thing or do they say, oh, maybe
this poses a danger does in the future. They say
two things. One is we serve our customers. They want
to buy these cars. We're going to get them into
this car. You know, you get a customer walks in
the door with a car with a five thousand dollars
balance on the loan and they want a new car.
We're going to get them into that car, they say that,
(09:20):
And so they they're very short term oriented. They want
to make the sale. They're quarter to quarter. These guys
do not think about the financial health of their customers.
Like a mortgage broker in two thousands. They don't own
the loan, right The loan goes to carlanders. And it's interesting,
so you mentioned mortgage crisis, so we all know all
these mortgages went bad and banks got crushed, right, Well,
(09:42):
back then, car loans didn't go bad. I mean some did,
but not nearly to that extent. And one reason is
because consumers, if you lose your house, you go to
rent somewhere and you have a place to live. For
most people, you can't get to work without a car.
So the last thing you're not going to pay off
as a car loan. And the people who don't don't
pay off the car loan, they repossessed a car. And
so it was a low risk form a lending. So
(10:04):
there's been a ton of money pouring into car lending
since the financial crisis because it was seen as a
good bet. Because of course, what was seen as a
good bet last time has to be a good bet
this time around, exactly. And also it's low interest rights.
It's hard to make a return on your money, and
so car lending is a pretty good way to make
a return, especially for people with low credit. And you said,
they said two things, So what's the other thing the
(10:26):
dealers told you. The other thing is these people want SUVs,
will give them SUVs they want. You know, they can
be irresponsible with their money, but you know it's not
our job to judge them. Did you think it with
the people you talked to were making irresponsible decisions or
did you see them more being backed into a corner
where they didn't have all that much choice. It's usually
(10:46):
a combination. I mean, so sometimes people spend too much
on a car, Sometimes people ran up credit card bills,
and sometimes they had unexpected expenses and they thought, wow,
I one hundred and forty thousand dollars a year, I
can afford all this stuff. So we got a ton
of response on the story, and a lot of it was,
(11:09):
these people are responsible when I grew up, when I
went to college where I didn't borrow, We didn't borrow
back then. Oh he's these answers. And my response to
those people was, look, first of all, for the people
who grew up twenty thirty years ago, the amount of
credit available today is far bigger than the amount of
credit that was available back then. I mean, people didn't
(11:30):
have lots of credit cards. Car Loans were harder to get,
there were no leases. It's credited. I'm thinking of that.
Ask our wild quote. Most morality is only the lack
of opportunity, maybe in most debt free lifestyles, or only
the lack of credit. Yeah, exactly, exactly. So that's one thing.
The other thing is it doesn't really matter whether people
are being irresponsible or not. The fact is this debt
(11:54):
level out there in the economy, and so the real
thing that matters is the US economy is driven by
consumer spending. Two thirds of you know, the US economy
is consumer spending, and a big chunk of consumers have
been spending by borrowing. And so two things happen. Either
they reach a limit, you can't keep borrowing, you've maxed
out your credit cards, they won't lend you a more
(12:17):
money for a new car. You know you're maxed out,
or you'll lose your job, or you get a pay cut,
and or you know there's a recession and you can't
pay and you default, right, right, So in both cases
it hurts the economy. And so the biggest point we
try to make is like, you could say what you
want about these people, but you've got to understand that
there is an economic cost to this, and policymakers need
(12:41):
to understand what's going on. And you see in the economy,
So the economy has stayed relatively strong, and you know,
largely because the jobs market has been so great, but
you know, when interest rates went up over the last
couple of years, we saw hired defaults on credit cards,
We saw the housing markets slow down, and so people
(13:01):
very sensitive to debt. They've borrowed a lot, they're very
sensitive to interest rates, and so that's an economic impact.
I hate just make too many analogies to the financial crisis,
although although they're they're right, they're waiting to be made.
But there was such a debate about where borrowers and
the financial crisis irresponsible, right, And in the end it
didn't matter because whether it's a predatory borrower, predatory lender,
if there's debt in the system that can't be paid back,
(13:23):
that's that's a massive problem. Right before we get to
those broader economic questions, I want to come back to this,
the way in which you broke down the categories of
debt and tell me about student debt. Were you It's
it's been a headline, but were you. Were you surprised
by the magnitude of the impact it's had on people's lives.
I knew the numbers. We all know the numbers. You
see the chart going up and up and up and
(13:43):
up and up. But then you talk about the impact
and it just weighs on people. It's just at the
time in your life when you are kind of just
making it. You have a lot of expenses, You've gotten married,
you may start a family, You're you're needing things, you know,
and it's a tough financial times. Everyone has a story
of I was twenty eight years old and I was
(14:05):
down to my last nickel and then something how, you
know whatever. Everyone has that story. But when you have
fifty thousand dollars with the debt sitting on you, especially
like married couples, you know, eighty thousand dollars whatever, you know,
you can't there's no margin for error, and there's no
margin for error meeting either screwing something up, having some
kind of financial surprise, or spending too much going on
(14:26):
a vacation. You know. One of the couples, one of
the families we wrote about, deep in debt, really struggling,
and they were slowly getting their arms around things. One
of the cars got wrecked, so they had to buy
a new car, and then they were invited to three
out of town weddings in a row, so airfare, hotels, gifts.
(14:50):
They have a young child, so they had to get
either childcare or whatever. It was a lot of money.
It was a few thousand dollars, and it went on
the credit cards because there's no other way, and so,
you know, and then credit cards at twenty percent interest
or eighteen percent interest, which they're not paying off anytime soon.
It's tough. Yeah. I thought one of the most pointed
(15:10):
lines in your story it was a quote from one
of the people you talked to, and he said, what
was supposed to be an asset became a liability. And
I think that about education and that seems to me
to have deeper societal ramifications if people are starting to
perceive that this thing, and education is supposed to be
all of our goals, has actually become a liability. Did
that stand out to you in the same way. Yeah,
(15:31):
I mean people didn't regret their education. They regretted going
to private colleges, They regretted maybe not working while they
were in school, they regretted taking on so much debt,
and they didn't understand it. But again, like when you're
eighteen nineteen years old, you don't understand it. And it's
also interesting you go back to the financial crisis. You
(15:53):
look at the rise in student debt and it picks
up when the financial crisis hit. And you talked to
a bunch of experts and they say, look, a lot
of people counted in equity in their homes for to
pay for college tuition because the home was a piggy
bank in the two thousands. Everyone that fascinating connection ten
(16:14):
or twenty percent a year. And so you know, you
had yourself one hundred thousand dollars in equity in a
home or whatever, fifty thousand and that was going to
help pay for college. Once that equity got wiped out
and you couldn't borrow against your house, it was tough,
and so parents took on student debt and kids took
on student debt, and so it's sort of this lingering
echo of the financial crisis, and it just left people
(16:37):
vulnerable and it's plays out. I had not thought about that,
about the connection between the rise and student loan debt
and the financial crisis. And what's interesting is that it's
a vicious circle, isn't it. Because you have a lack
of home equity means that people have to pay outright
for education where they might have been able to finance
it with borrowing on their home. And then because people
have so much student loan debt, they're not able to
(16:59):
buy homes right. And so so this one of the
odd components in here is mortgage debt. Right, And were
there surprises for you and what you saw on the
picture and mortgage debt? People still want to buy homes
the people we talk to. The statistics don't really bear
that out. I mean, we've seen a decline in home
ownership from the peak, but but people we talked, we
(17:19):
still want to buy homes. They feel like it is
what a middle class family should do. But one of
the things that we have written about, and we'll write
about more, is there's been this big rise in the
rent rentals of single family homes. So typically people rent
apartments and condos and they own homes, and the economics
(17:42):
of trying to rent homes at scale rent a thousand
homes has always been really hard. But a bunch of
folks brought up homes post financial crisis, big investors, and
they have them and they've been very popular. And the
people who rent these homes say, listen, our people make
one hundred thousand dollars a year. Our tenants make one
hundred thousand dollars. You they're not poor people, but they
(18:03):
have no assets. They have debt. You know, when you
add up I own X, Y and Z, and I
have X, Y and Z debt and it nets out
to zero or only a little bit, and so they
don't have the money to put down. We talk to
a guy at the Federal Reserve who studies this stuff,
and he said, you know, buying a home for the
average person in the average city is becoming a luxury.
(18:25):
It's really a luxury and that is a difference from
the past. I thought it was stunning. I had no
idea that Blackstone, the big private equity firm, is now
the largest renter of single family homes. That it's really interesting.
I thought, I've I've done a fair amount of work
on housing, and someone said to me about our broken
homeownership policy. Let them meet rent. And you think about
(18:47):
that now, because in the end, right this has huge ramifications,
and that it's people's homes that paid for them to
retire often, and so what's the spillover effect of a
nation of renters who with no assets. One element of
this story is income inequality, right, and wealth disparity, and
they go hand in hand, but just on the wealth side.
(19:10):
So people accumulate wealth basically in two ways. For the
average person, One is they invest in the stock market,
bond market, you know, whatever. And one is their own
real estate and stocks and bonds and all that are
basically the vast majority are owned by the wealthiest people
top ten percent own a huge amount of securities, and
(19:34):
real estate is owned by the middle class. And so
wealth creation for the middle class is depended on real estate.
And you go back to post World War two, for
sort of. The three decades after World War Two, real
estate prices were up and the middle class did really well,
and wealth gap, the wealth gap in the US was
pretty was relatively small. You go back to more recent years,
(19:58):
the stock market has done much better than housing, and
there's been this gap. Now, this is a complicated story.
I don't want to oversimplify. Well, that's fascinating. When you
don't own a house, you lose that opportunity both for
force savings you're paying down your mortgage and your accumulating
equity in the house and appreciation of the asset. And
that's how middle class people have made money maybe just
(20:19):
like you said, made their retirement for decades. And so
if you don't own anything, it's tough to build that up.
And the problem is the debt that's gone up. Student loans,
car loans, credit card doesn't help you accumulate wealth. I
mean student loans arguably, arguably because you make a higher income.
And so yes, that that is. But a mortgage is different.
(20:41):
A mortgage. I mean, if you think about it, even
if you take on a big mortgage and you work
hard to pay it off and you even get in
over your head someone if you can stick with it.
You have this house happy set, right, And the house
is for most people, if you're law own it long enough,
gone up in value, and these other things don't do that,
and so it widens the wealth gap. And that's been
(21:02):
a political issue and an economic issue. So another component
of this that I found really interesting was the way
in which unsecured personal loans are also exploding. And that's
got a couple of components, right, It's it's one tells
a picture of what's going on with people, but it
also tells a picture of this or paints a picture
of this ferocious competition between traditional lenders and new upstart lenders. Right,
(21:24):
And how how did you guys think about that? Again,
interest rate to low, it's hard to make a return.
And one way you can make a nice, sweet return
is lending to consumers because they pay higher interest rates
until of course they don't pay at all, Right, And
so that's the risk you take, and everyone seems to
think that that's a good risk. The problem is, as
we know, and there's a lot of competition, people make
(21:47):
bad decisions, The lenders make bad decisions, and so you
have these Silicon Valley financed lenders fintech lenders. You have
golden sacks champions, right. I mean it's interesting and they
want to build a deposit base. I have no idea
how that's going to play out for them. And then
all these banks pulled back on personal lending post financial
(22:09):
crisis because it's risky. It's the first thing you don't
pay off, right, you know it's insecure. What are they
going to do to me? And so you don't pay
it's a credit card, right, And they're all doing it again.
So's you know, a lot of people trying to find
that market. Did you in talking to people for this,
did anybody voice worry about what happens if the recession
(22:30):
everybody's looking for hits. The whole premise that people lend
and borrow in these markets in these times is they're optimistic.
I mean, you don't lend to someone if you're pessimistic, right,
and you don't borrow if you're pessimistic. So everyone is
optimistic that they'll have a job, that wages will be solid,
that the borrowers will pay things off. And so it's
(22:53):
an assumption. And people have made a lot of money
being positive and optimistic, right, And people have lost a
lot of money being up positive and optimistic, and we
don't know what's how it's going to happen. But when
you have ten years of economic growth, that's the time
when people get sloppy. Right. Historically people do stupid things
when they have things have been good for a long time.
(23:13):
And so I'm not saying people are doing stupid things.
But you know, what's interesting, as you point out, though,
is how different the mood feels than it did. You know,
in two thousand and five, two thousand and six, it
felt a bulliant, right, and now we've ten years into
this supposed, you know, economic growth, and it doesn't feel
a bulliant and it's just it's it's really interesting contrast
(23:34):
when you think back on how just how the mood
of the country feels. And that was one of the
reasons we originally got into the story, was like, some
doesn't quite add up. People are feeling nervous, people have
I don't want to say they've been cautious, but there's
just there's not that ebulence that we saw before from consumers.
And I'd like to think we kind of try to
(23:55):
sort that out a little bit and explain that definitely.
Do you think it's eyes the hands of the Federal
Reserve a little bit. I mean, there's an immense amount
of controversy surrounding FED Chairman, your own Powell. Now, right,
we've had these low interest rates, totally ahistorical for a
longer period of time than anybody would ever have imagined.
There's no room for them to go lower. But can
(24:16):
they go higher? When you think of what that would
mean for all of these households that you profiled, it
would be very hard for them to go higher. The
good thing in the US is mortgages are mostly fixed rate,
and so that wouldn't hurt so bad. But you know,
credit cards, auto loans, either they adjust or people know
that I'm they're going to have to borrow to get
a car in the next two years, and so they're cautious.
(24:37):
It makes people cautious. And we saw it, you some
evidence last year that the interest rate increases were biting.
I don't know that the consumers were the big reason
why the economy is slowing and the FED is cutting rates,
but it's certainly a factor. And the idea that they're
gonna be able to get rates back to four percent
five percent, right, shocking, right? Not alone the ten and
fifteen percent, and that our parents grew up and can
(24:59):
you imagine, So you had a line in the story
that maybe this is a vote of confidence in the future.
That may be borrowing as a sign of confidence in
the future. Do you believe that most people will borrow
if they feel that they can pay it back, and
so it is a sign of confidence. It may be
a misplaced sign of confidence. People may be over confident
about how things are. Look we all know from psychology,
(25:19):
you know, people extrapolate what they've seen in the recent
past into the future, right, And so if the economy
has been good, people think it's going to stay good.
If the stock market's been down, everyone thinks it's going
to keep going down. So it's human nature, and I
think it is a vote of confidence. It just may
be misplaced, right, Although it's also another way to look
at that, and this is not my thought, I don't
remember who said it, but that we've become a nation
(25:42):
of basically interest expense rather than rather than principle. So
we look at can we pay the interest, We don't
think about paying back the principle. And then that would
play into your idea that it isn't really that if
it's a misplaced vote of confidence because we're not thinking
in terms of the principle. We've been taught for so
long to think in terms of the interest, right, No,
I think you're absolutely right. I mean, look, so I
mean internally, recall this story and some of the other
(26:03):
stories you've done. Rent or nation. So you don't own
a house. You rent a house. You don't own a car,
your Lisa car. You don't even buy your phone, right,
you pay No one buys a phone, you know, you
pay it twenty five dollars thirty dollars a month, right
for two years, and then you get another phone, so
you're always paying your phone. So no one owns anything
anymore in the middle class. And that's an exaggeration, of course,
but the mentality, just like you said, the mentality changes,
(26:26):
so like, Okay, what's my monthly payment, what's my monthly income?
Can I do this? There's no thought of do I
want to put away fifty thousand dollars for a down
payment on a house? Do I want to put money
away from my kids college? So I want to, you know,
like really save and think about the future and think
about assets. It's just cash flow. It's just in and out.
(26:46):
Another example of short termism. Right, So the politicians are
talking about many of the Democratic candidates are talking about
student loan forgiveness. Is that just a small piece of
the puzzle as you think about this array of debts
bread in front of us. Student debt is a trillion
and a half bucks. I think it's a big piece
of the puzzle because it would take a burden off
(27:08):
of the middle class, which would then they would be
more money left for them to spend and save and invest.
I think it would be a real game changer for
people who really are looking at it a decade of
student loan payments in the years where they should be
starting to accumulate assets and things like that. Does that,
(27:30):
in and of itself have the power to start reversing
this trend toward renter nation? Do you think or do
you think there are other things that would need to
be done concurrently? I think it would go part of
the way to reversing that. I mean, I think someone
who has fifty thousand dollars in student loan debt, I
think would be happy to take on more debt to
own a house and see something for it. I mean,
(27:53):
student loan debt is also this weird thing. When you're
paying off a mortgage, you're living in the house, When
you're paying off a car, you're driving the car to loan.
That is like I finished school five years ago, I'm
still paying for it. It's like a It's just a
bad way. And of course you're benefiting taxiological, you're benefiting
from the education you got, hopefully with the job you
have and the income you have. But it's a hard
(28:14):
thing and it just is. It weighs on people. And
the one thing I'd say is the impact would probably
be not as great as the optimists or as the
people promoting it think, because the reality is a lot
of people are not paying off the student debt. There's
a big default rate, or people are just behind, and
then a lot of it is in deferments because people
(28:35):
are still in school or whatever. And so the big
number that people always read is really not the amount
that's getting paid off. It's a much smaller numbers. So
the economic impact would probably be small. It would make
it would ease a huge psychological burden, but it would
make less of a difference in people's monthly cash lot
than than you might expect. Isn't part of the problem too,
(28:55):
that student loan debt that if you if you don't
pay your loans, they can even come after your Social
Security money later on. I mean, it just has so
many reverberations. What's really tough is you can get rid
of it in bankruptcy. And so, you know, the great
thing about US bankruptcy law had been, you know, in
a year's past, it gave people a fresh start. It
was awful, but it gave you a fresh start. Now
(29:15):
the laws have gotten much tougher and it's gotten much
harder to declare bankruptcy, but it's still a way out
for people. And you know, you can't get everybody student
debt in bankruptcy, and so it's this burden that you
carry with you. So did you, in thinking as you
reported this piece and wrote it in the other pieces
you've done, did you think, wow, we just need a
radical rethink of how we all live and of economic
(29:38):
policy or did you sort of shrug your shoulders at it?
What was what was your response? I think we're going
to have to address it because at some point, people
with this level of debt will reach a limit of
borrowing and that's going to hit the economy, and the
economy is dependent on contumer spending, and if consumers are
not spending, the economy really slows down. And that that's
(30:00):
that's sort of the thing that's sitting out there. I
think that's it's a hugely frightening issue lurking over all
of this, Right, And it's a double whammy in a sense,
because not only does consumer spending slow down, then you
have bankruptcies at the same time. Right, that then further slowdown.
It will provoke a vicious circle. In other words, Right,
what do you make of the fact that this isn't
just a US issue? You spent a lot of time
(30:22):
in Asia and you led a twenty thirteen series entitled
China's Rising Risks, which highlight highlighted the potential problems called
by China's China's rapidly rising debtload in the Journal just
did a front page story about the rise in debt
in China. Why is that and what does it mean
that this isn't just a US issue? China is fascinating
and the Chinese economy as a whole. You can have
a whole discussion about it. But Chinese economy has been
(30:45):
very debt dependent for a long time now. And at
first it was Chinese companies that were borrowing and Chinese
real estate developers that were borrowing, but more recently Chinese
consumers have been borrowing, particularly young consumers. The Chinese have
always been great savers, partially because frankly, it's been a
tough place to live for many decades, and people saved
(31:06):
because they had to. You talk to people who are
you know, middle age and older in China and they
are like, they save every yuan and they invested in
real estate, they keep it in the bank whatever. Young
people have not done that, and they've been spending every
dollar they get. And you know, one of the parallels
with the US is it's very easy to borrow in
China now. I mean it was not easy to borrow
(31:28):
in China a decade ago. As short as a decade ago, really,
people didn't have credit cards people, you know it. It
was a cash economy. And now it's an electronic payments
economy and you borrow on your phone small amounts very simply.
And some of that spending is on goods from American companies. Right.
So there's also one of the downsides of a global world.
(31:51):
Is that there's a potential for a boomerang effect there, right, sure,
I mean, you know, China is a huge market and
companies Apple, Nike, you know, all these companies have done
well there, and yeah, some portion of it is debt
and Chinese travel, the amount of Chinese going overseas, I
mean there's a lot of Chinese, you know, and even
when a small number goes overseas makes a big impact.
(32:12):
And that's helped the US economy and the global economy.
Travel in Europe, Chinese tour groups are everywhere and they're
spending and that's had a big global economic impact. So
we might be headed for a huge rethink all over
the world. It could be Yeah, I mean again, at minimum,
at some point, if people keep borrowing, they reach a
limit on how much they can borrow and how much
they could spend. And that is the thing that sort
(32:34):
of sits out there. And you know it's not only China.
The UK debt levels are very high, Canada debt level
is very high, Australia, same thing. Central banks in all
those places have said, essentially, consumer debt is a big
issue for US. It's hard to raise rates. We really
need to watch that, and so it's it's not just
the US and China. So it's both reassuring and that
(32:56):
it's not just profligate, entitled US citizens, right, but it's
also incredibly frightening because it is global, and that means
there's no place to turn. Well, thank you so much
for all the fantastic work, and thanks for coming to
talk to me. Thank you. As Ken and I talked,
I thought about what's been a theme of this podcast,
which is short termism. Our own short termism is consumers
(33:17):
as we think only about the interest we have to pay,
not about the principle, but also business short termism and
lending to increasingly cash strapped consumers. The former makes me sad,
the latter frankly makes me mad. Will they expect another
bailout when the inevitable recession comes? And a worried little
voice in my head also kept saying something has to
(33:39):
give and soon. The longer term ramifications of what can
called renter nation are ugly. What happens is renter's head
into retirement. I've always been resistant to relying on policymakers,
but the incentives for us and for businesses have to change,
and I think we have to change our behavior. In
any event, the economy, the global economy, is going to
(34:00):
undergo some seismic changes. Making a Killing is the co
production of Pushkin Industries and Chalk and Blade. It's produced
by Ruth Barnes and Rosie Stoffer. My executive producers are
Alison McClain no relation in Making Casey. The executive producer
at Pushkin is Mia Loebell. Engineering by Jason Gambrell and
(34:22):
Jason Rostkowski. Our music is by Jed Flood. Special thanks
to Jacob Weisberg at Pushkin and everyone on the show.
I'm Bethany McLain. Thank you so much for listening. You
can find me on Twitter at Bethany mac twelve and
let me know which episodes you've most enjoyed.
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