Customer Reviews

Shortchanged: Life and Debt in the Fringe Economy (Bk Currents)

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4 star:		(2)
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1 star:		(2)

 

 

In 1996 the Personal Responsibility and Work Opportunity Reconciliation Act transformed welfare to workfare, and the lives of the poor were radically altered. In 2001 Barbara Ehrenreich (Nickel and Dimed) showed us the health and housing woes of the working poor, concluding, among other things, that minimum wages must rise. Last year David Shipler (The Working Poor) expanded Ehrenreich's experience, concluding:

". . . [W]orking poverty is a constellation of difficulties that magnify one another: not just low wages but also low education, not just dead-in jobs but also limited abilities, not just insufficient savings but also unwise spending, not just poor housing but also poor parenting, not just the lack of health insurance but also the lack of healthy households" (p. 285).

In this volume Howard Karger makes an amazing contribution to our understanding of the working poor. He moves beyond Ehrenreich's simple solution (give the poor more money and they will not be poor), and he avoids the scent of victim-blaming that clings to Shipler's work despite his sensitivity and compassion. Instead, Karger analyzes the alternative financial services sector, or fringe economy, and shows how it systematically stalks the poor, working poor, and vulnerable middle class.

What is the fringe economy? Karger describes it as "corporate and business practices that have a predatory relationship with the poor by charging excessive interest rates or fees, or exorbitant prices for goods or services" (p. x). Laying aside the obvious counter-argument that high risk deserves high rates of return, who are the primary customers for the fringe economy? Karger notes that it is the 28% of American adults without a bank account, the 40 million Americans without health insurance, the 33.1 million foreign born residents, especially the undocumented segment, and the high debt, low asset segment of the middle class.

Does high risk justify high rates of return? Secured credit cards assume no risk, yet charge high origination fees, high monthly service fees, and high interest rates. Pawnshops rarely loan up to 50% of the value of surrendered collateral with interest charges as high as 24% for a single month. Payday loans are secured by check or electronic debit with the debtor liable for criminal charges for non-payment and earn interest equivalent to 800% a year. In 2002 tax preparation services, refund loans, and check cashing fees related to government-backed Earned Income Tax Credits cost the working poor $1.31 billion. Rent-to-own stores routinely price furniture and electronics at more than double the prevailing purchase price. Independent used car lots do the same.

The sad fact is that the fringe economy assumes almost no risk. Because the clientele does not have access to mainstream sources of credit, the fringe economy is able to set prices at will, and does. Whether one is looking at the credit card industry, used car sales, housing, telecommunications, or even the get-out-of-debt industry, the story is the same. Almost no one is barred from access, but for those without good credit, the costs just continue to escalate.

I have been a certified public accountant for over 20 years, but I learned a lot by reading this book. I can think of no better source of information on how our American consumer economy actually operates. I became more enthusiastic about the book with each chapter I read, and you will, too. Reading it, however, might entail a bit of risk. It is likely to change your own consumption patterns, and it is likely to result in the purchase of multiple copies, especially if you have people close to you that you would like to help!

Shortchanged is essential reading for anyone concerned about economic justice in America. By chronicling the fiscal ravaging of America by check-cashers, sub-prime lenders, buy-here-pay-here auto lots, rent-to-own furniture and appliance stores, and the like, Karger details how predatory scams bleed the poor and working-class of vital income. Karger's reforms are logical and plausible, making the book within the best of the American Progressive tradition.

"Pawn shops, check cashers, rent-to-own stores, payday and tax-refund lenders, auto-title-loans, buy-here-pay-here used car lots - what seems to be small independent storefront operations turn out to be part of an economy dominated by well-financed corporations with little-no oversight and increasingly strong ties to mainstream financial institutions" - so claims "Shortchanged" summary material. The book then goes on to provide stories of real people trapped in perpetual debt, usually starting with overpriced goods, and acerbated by high interest rates and required extra charges.

Karger admits that serving the poor can cost more, and thus would justify higher prices. However, he cites examples of pawning a vehicle for 1/3 its value and paying interest of up to and over 300%/year to get it back, depositing $100s-$1,000+ in low-interest savings accounts to acquired a secured credit card that charges 30%/year rates (and more) to use, check cashers paying 3% to cash relatively risk-free government checks - and concludes that clearly the line separating "reasonable" from "unreasonable" was crossed.

Karger's material is well-documented, providing sources for his claims - eg. "almost 10% of unbanked households' net income is spent on alternative financial services,." "consumer debt, excluding mortgages, averaged about $19,000/family in '04," "68% of EITC and CTC eligible families use tax preparers (average cost $305 in '01; total of $1.3 billion vs. $EITC payouts of $30 billion." However, sometimes these claims, despite documentation, do not seem to hold water - eg. Karger states that the "bulwark of public assistance programs cost $125 billion/year or less (low-income housing, AFDC and its successor program, food stamps, WIC, school lunch), compared to check cashers, payday lenders, pawn shops, rent-to-own growing $78 billion in '01 - the problem is that the $78 billion did not appear substantiated by the detail.

Information on how these purveyors of credit to the poor avoid usury laws is provided - eg. require a loan applicant to sell up to three household items to the lender, and then lease them back.

The material on home mortgages for the poor was particularly eye-opening - balloon payments, shared appreciation mortgages (due at maturity), extra insurance fees, foreclosure "help" that often takes the customer's equity, and high interest rates (location, credit rating). Car sales (over-priced to begin with) that allow the seller to break-even in about three months, accompanied by a 30% repossession rate for "buy-here-pay-here" and frequent profitable trade-ins upon breakdown. (They even have companies that rent tires - at high fees and rates!)

Debt counselors get about 15% from money paid to credit card companies - some counseling firms are reputable and provide good service. Others steer money towards the credit card companies, neglecting home mortgage and car payments. Only 26% complete the process.

So, one wonders, if these firms are making so much money, why don't others come in and compete down the charges. In some cases this is happening - Wal-Mart is now providing check-cashing services at far lower charges than check-cashing stores. On the other hand, there is also a problem with low-income consumers being their own worst enemies - eg. not knowing that they could cash a payroll check free at the issuing bank, or even the advantages of having a bank account. (I'm left wondering how President Bush's privatization of Social Security would possibly avoid these people being taken advantage of.)

An excellent book, even for someone like myself who thought he knew it all already!

I work with a client population that includes many individuals who are in recovery, often depressed and in need of coping skills to manage the grief of various calamities or social injustices. Inevitably their plight is exacerbated by financial woes, and I am learning to recognize the ominous influences of that downward spiral that leads to the "economic netherworld" revealed in Shortchanged! What an eye-opener! This view of "life and debt in the fringe economy" has really helped me appreciate the shadowy dimensions of consumer vulnerability that individuals and their families are encountering in the concrete jungle.

Although I have passed by these small business establishments regularly, I have tended to ignore the pervasive presence of payday lenders, pawnshops, check-cashers, tax refund lenders and rent-to-own stores. I was shocked to learn that this $125 billion a year industry has more locations than MacDonalds, Burger King, Wal-Mart, Target, Sears and J.C. Penney combined!

Karger's research of the alternative financial services that make up the fringe economy amplifies the importance of financial literacy and consumer education ... life skills that go well beyond merely finding a job and/or generating an income. This information should be incorporated into public education!

Shortchanged is not "Nickel and Dimed" warmed over. While the author's vignettes may include trials of the working poor, this is a very different book. Definitely a challenge to critical thinking about the symbiotic relationships between predators and their prey!

This book will affect your life! People and companies are going after our treasure. This book will show us how they work and more importantly how not to get taken. I believe it can save some of us from financial calamities at the hands of unscrupulous sales people, con artists, and merciless financial institutions. This book is for people who have some money and don't particularly want to lose it.

While Nickel and Dimed is an excellent read, in key ways it lacks authenticity. Barbara Ehrenreich, while attempting to live the marginal life, could always fall back on the resources of her "real" life, which she admittedly does on occasion. Her actions in these instances underscore the importance of Karger's book. Where do the actual poor, who can't step out of a temporary context, go when they need something to fall back on? As Karger so clearly illuminates, they must look to those who "have" and are anxious to give - at interest rates that guarantee the customer will be back, again and again. Karger's keen observation of the relationship between morality and economy may hit too close to home for those benefiting from the system. For those committed to reform of a predatory economy, he offers critical strategies for change. This book is an eye opener and a wake-up call to those of us who have not lost our moral center.

On a personal note, my friends and family who will see themselves in this book - lured by the "easy" money of the fringe economy - have gotten this book as a PRE-Christmas present. I hope they read it before they borrow money they'll never to really be able to pay back to buy Christmas gifts they can't really afford.

Karger reveals what he accurately terms the "fringe economy". Something possibly unknown to those safely enscounced in the American middle class. This fringe is inhabited by working class people, which might have experienced a bout of bad luck. This can come in the form of losing a job, or having a very low paying one. Or perhaps a chronic illness, that severely restricts what types of jobs one can get.

Within the fringe economy, the book shows a range of companies that might be accurately described as predatory. Offering short term payroll loans that amount to over 100% interest on an annualised basis. Or for those unable to buy furniture, these are made available on a rental basis. Again, typically at an annual rate of over 100%. Such techniques might perhaps be aimed at those who exhibit poor personal money management. The deservedly imprudent, if you will. But the techniques also take aim at those who carefully count every dollar, and who do not squander what little they have.

The fringe economy is a poorly-understood shadow structure operating below the surface of maintstream life, according to Karger, a professor of Social Work in Texas. His outlook is more broad than deep, but I applaud both the scope of his work and his policy recommendations. While I would disagree with a few of them (as an economist I have a slightly different perspective of the function of financial institutions), the suggested policy actions offer a launching point for further discussion that is missing in some other purely emotive works. I also applaud Karger's effort to tackle this fairly ethereal subject (much like the idea of the 'economy' itself) and put it into human terms.

I knock one star for the presentation of statistics - there's a little too much of it without enough order to support their presentation. However, these do not detract from the logic of the book, only from the continuity in a few sections. Otherwise, an eye-opening read.

This book is a well-organized, comprehensive treatment of America's "shadow economy". The author provides facts and figures, along with his well-researched topics, which range from payday loans to predatory mortgages.

I bought this book because I love books about economics and finance. I enjoy reading about the pitfalls of credit and the dangers of an over-leveraged society. And I wish everyone could pull themselves out of this dangerous cycle and live debt-free.

What I don't love, however, is reading an author who puts the blame for society's ills on everyone but the individual. For example, it's not Joe Sixpack's problem that he makes $8 an hour, but HAS to have a $4,000 big-screen LCD television. It's Sony's fault for having compelling marketing, and the predatory bank's fault for loaning him the money, and Wal-Mart's fault for selling him the TV, and the cable company's fault for broadcasting NFL games, and the NFL's fault for allowing games to be televised. Poor Joe Sixpack -- he can't possibly live with a 20" CRT TV -- he needs an LCD TV. So he's a victim.

It's also not Joe's fault for the 32% interest, over-limit and late fees he's paying. It's the bank's fault for not letting Joe slide when he needed beer money and a cool stereo for his new car and couldn't pay his bills for a few months. Poor misunderstood Joe.

The author also rails against payday lenders. Never mind that payday lenders employ ten of thousands of people in blighted urban areas, and provide much needed access to money to buy food or heating oil. They're evil because they expect that money back! And who are they to add an interest rate to cover operational expenses and provide salaries for those inner-city employees? The nerve!

I should have read about the author before purchasing this book. If I had realized that he was a purveyor of pseudo-science (sociologist) living in an ivory tower, and not an employed, real-world financial analyst I would have passed. I did manage to sell it used for two-thirds of what it cost me though. I guess I'll just consider that interest paid.