Flashing Red Lights: A Warning for Our Economy
Ranking Member Elizabeth Warren on Trump’s economic chaos, what’s broken, and how we fight back.
Good to blog with you again. I have spent my whole career working as an expert in economics, trying to answer one central question - why are working class families struggling financially?
Before the 2008 financial crash, I was a bankruptcy and commercial law professor ringing the alarm bell as loud as I could about the risks bubbling up in our economy. I called out subprime lenders who were tricking and trapping families. I highlighted how families were getting deeper into debt and borrowing against their homes, and that foreclosure rates were going up. Those flashing yellow lights turned into flashing red lights and, ultimately, set the stage for the financial crisis. Americans lost trillions of dollars of savings, unemployment skyrocketed, and millions of people lost their homes. Nearly 20 years later, many communities still haven't fully recovered.
Today, I’m writing to ring the alarm again about the flashing red lights that our economy may be heading over a cliff, and, once again, could take down millions of working families that are barely hanging on by their fingernails.
Over the last week, markets crashed and talk of a recession intensified. People are rightly worried about job security and whether prices will go up, while businesses everywhere are worrying about how to plan for survival. Unlike 2008 or 2020, today’s economic turmoil is not the direct result of Wall Street recklessness or a once-in-a-generation virus; today’s crisis has been caused by one man: President Donald Trump.
Working families are already extremely vulnerable, even before the Trump chaos hit. Consumers are carrying more household debt. Savings are low, and medical debt remains high. Wage growth for people who are starting new jobs has slowed. The American people cannot afford for Congress and regulators to hang back as risk builds in our economy. They certainly cannot afford for President Donald Trump to destroy their financial futures to boost his own ego.
Lights are flashing red, but it is not too late. We still have time to prevent economic calamity for American families if we act quickly.
Flashing Red Lights
Since President Trump’s inauguration on January 20, our economy has experienced a dramatic shift in direction. Three months ago, the U.S. economy appeared to be moving toward what economists would consider a “soft landing” – slowing inflation without triggering a full-blown recession. The Personal Consumption Expenditures index – the Federal Reserve’s preferred metric for tracking inflation – had cooled significantly from its nearly 7% peak in 2022 to 2.6%, while unemployment held steady at around 4%. Our economy continued to grow at a steady pace despite the Fed's prolonged interest rate hikes. Far too many working families are struggling with high costs, but by most measures, America's economy was recovering in the right direction. Donald Trump campaigned on his repeated promise to lower prices “on day one.” Two months into the Trump presidency, he’s done the opposite – unleashing economic chaos that threatens to wipe out any economic gains we’ve made over the past four years and could send us spiraling into a global financial meltdown.
Here's a slightly deeper dive into the current economy:
Inflation progress is stalling: According to Chairman of the Federal Reserve Jerome Powell, President Trump’s massive tariffs threaten to trigger a new round of inflation. Trump’s “across-the-board” tariffs apply to pretty much every country for no rhyme or reason. Instead of using tariffs strategically to create jobs or build things in America, the President is setting the stage for businesses to slash investment, cut jobs, and give giant corporations cover to raise prices on Americans. Last week's immediate market reaction was devastating—Americans lost thousands in savings and retirement funds.
Layoffs are on the horizon: While job creation has been a bright spot in our economic recovery over the last several years, many analysts debated whether last week’s monthly jobs report was the last solid one we’ll see in 2025. Why? Because President Trump and his co-president Elon Musk are taking a chainsaw to the federal government — gutting programs that spur innovation and economic growth. Because of their severance arrangements, the federal firings don’t yet show up in the unemployment numbers, but those layoffs from our nation’s largest employer will be felt everywhere. The local D.C., Maryland, and Virginia economies will be hard hit, but the downstream consequences will ricochet across the economy as the private sector is forced to pause work dependent on government contracts. Former government workers will have less money to spend in communities to support small businesses and jobs. Some companies have already announced layoffs as a result of Trump’s tariffs. And the Fed’s current actions to leave high interest rates in place are likely to last even longer as Trump worsens inflation, which puts more stress on nationwide employment. These actions threaten to wreck an already softening labor market. Job openings are declining and continuing unemployment claims are the highest they’ve been in nearly four years.
Financial rules have been gutted: As we learned in the 2008 crash, an economy pitted with fraud and deceit is ultimately an economy at risk. President Trump and Elon Musk have attempted to axe the Consumer Financial Protection Bureau, leaving every American more vulnerable to cheaters and scammers. They reportedly plan to privatize Fannie Mae and Freddie Mac, which could increase mortgage rates and raise housing costs for families even more. They are “saving money” by laying off bank examiners responsible for keeping our financial system safe, and they are telling companies already caught violating the law that now that Trump is in power, the companies can go free. These actions reinforce an economy designed to let risk build up, paying dividends to the wealthiest among us, but landing hard on working people and small businesses.
Underlying systemic risks in the financial system. In addition to this immediate crisis driven by the policy decisions of the Trump Administration, our economy is vulnerable to shocks, which could further amplify risks. Too-big-to-fail banks are juicing their profits by quietly taking on riskier investments. The shadowy private credit market has loaded up on highly leveraged loans. Due to the lack of disclosure and other safeguards, we have little insight into this $1.5 trillion market and do not know how these loans will perform in a downturn. Hedge funds are leveraged to the hilt in the world’s most important financial market, U.S. Treasuries. Digital assets continue to be extraordinarily volatile and are increasingly interconnected with the core financial system. After waves of catastrophic losses, the insurance industry is facing a reckoning that even climate-change deniers can’t ignore. These potential risks may be masked when the economy is growing, but in a moment of downturn, any of these problems could spark panic and contagion.
Donald Trump’s erratic policy shifts have created an economic environment that, as Richmond Fed President Tom Barkin describes, is like having to drive through the fog with “zero visibility, pull over and turn on your hazards.” Consumers and businesses alike are pulling over—unable to plan and hesitating to spend until visibility clears up.
Immediate Response
We face a quickly closing window to halt the damage Donald Trump is inflicting on our economy. Congress must step up and immediately reverse Donald Trump’s tariffs by passing my bipartisan resolution with Senator Ron Wyden, and it should be putting plans in place to act fast if our economy slides into a recession.
Urgent actions:
Reverse Trump’s tariffs immediately: Donald Trump is relying on the International Emergency Economic Powers Act for his worldwide tariffs policy, and Congress oversees implementation of that law. Donald Trump turned these tariffs on, but Congress has the power to turn them off by passing a resolution reversing Trump's fake emergency order. Every Democrat would vote for it; if Republicans in the House and the Senate would show the courage to step up, they could save our economy from further destruction.
Ensure consumer protections: Predatory lenders, hidden fees, and deceptive practices strip billions from working families each year, undermining economic security and consumer confidence that drives our economy. The CFPB has returned over $21 billion directly to people who were cheated. Donald Trump and Congressional Republicans must stop their efforts to gut the agency and overturn its rules. Strong consumer protections make markets work better by creating a level playing field where businesses compete on quality rather than on their ability to exploit consumers, and consumers can make informed choices.
Strengthen oversight and capital standards for banks: The regulatory rollbacks during Trump's first administration let the banks load up on risk, and then, predictably, in 2023, three of the four largest bank failures in U.S. history were set off. President Trump has stacked his administration with financial regulators intent on repeating this play, weakening the rules for big banks even more and offering the banks a chance to grab the profits while the taxpayers are on the hook for a bailout. We need stronger financial rules and stronger enforcement to ensure that our financial system is resilient enough to withstand President Trump’s economic chaos.
Protect and expand social safety net: Now is the time to expand support for Medicaid so that the millions who lose their jobs because of Trump’s economic mismanagement don’t lose their health care coverage too. We should expand Social Security by passing an emergency, temporary Social Security adjustment so that retirees who will never get the chance to recover their lost savings are a little bit better protected from the chaos. We should shore up critical housing programs to ensure that people who fall on hard times aren’t kicked out of their homes. Musk, Trump and Congressional Republicans want to cut all three programs, which is exactly the wrong idea at the wrong time.
Unrig the American Economy
The explosions we can see in our economy right now are thanks to President Trump’s mismanagement, but they are built on decades of hollowing out our economy. Remember, people don’t experience the unemployment rate or GDP growth or year-over-year PCE. What matters to them is whether they have a job, whether their paycheck is enough to make ends meet, and whether they can pay off their loans, put aside some savings, and make a down payment on a home to start building long-term wealth.
Our economy is rigged against working families. Trade policy has taken the legs out from under workers while it has prioritized benefits flowing to corporate CEOs and wealthy investors. Too few new homes are being built, and interest rate hikes have pushed up mortgage rates—making housing more unaffordable. Private equity, subsidized by US taxpayers, have invaded the space, making fewer homes available for purchase and driving prices even higher. Household debt continues to increase, with credit card delinquencies nearing all-time highs, again driving up profits for executives and investors but leaving families struggling. Wage growth is relatively strong, but corporate profits are stronger. The labor market, though robust, was already starting to soften as sectors that expanded rapidly after the pandemic are naturally falling to more steady hiring rates and companies are already announcing hiring freezes and layoffs. Republicans are jamming through a new tax law that will give trillions to a tiny handful of billionaires and billionaire corporations, which will only make wealth inequality worse.
In election after election, the American people have asked us to unrig the economy. Unrigging is possible. We can make fundamental, structural changes in our government’s approach to the economy, finally putting American workers and middle-class prosperity ahead of multinational profits and Wall Street bonuses. We can make thoughtful federal investments, cut red tape, and take on Wall Street landlords to make it possible to build more affordable housing for Americans. We can take on junk fees, corporate consolidation, and price gouging, including by capping credit card rates at 10%. We can promote robust competition in the United States which will mean lower prices and more resilient industries here at home.
This will be a space where the Democrats on the Senate Banking, Housing, and Urban Affairs Committee, alongside key experts and thinkers, open up more conversations about what’s broken in our economy, and how we can fix it. As I wrote in one of my posts almost 20 years ago, this kind of discussion could be democracy at its best. We might not get everything right, but we’re in a unique moment to put forward bold, new ideas that would help level the playing field and avoid future crises.
At a time when we face an overwhelming number of financial and governance risks, I hope you'll comment and engage. When we give up and fail to notice the flashing red lights, Donald Trump and his team of chaos-mongers win. I’m here because I believe we can change that storyline and make this country work for the American people.
Join us!