Book Review - The New York Times

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New York Times – Sunday Book Review – 10/6/2015


“How The Other Half Banks” by Mehrsa Baradaran

Book Review By Nancy Folbre -- Director of the Program on Gender and Care Work at the Political Economy Institute at the University of Massachusetts at Amherst.



In 1890 the journalist Jacob Riis published “How the Other Half Lives,” a powerful indictment of the horrific tenements of New York that gave rise to a significant housing reform movement. Mehrsa Baradaran, a University of Georgia law professor, reaches for a similar impact in her description of the oppressive financial environment that low-income families inhabit.

The answer to the implicit question contained in her title, “How the Other Half Banks,” is simple: The “other half” hardly banks at all. Many families below the midline of income distribution in the United States rely heavily on check-¬cashing services, payday lenders and title vendors charging fees and interest higher than any chartered bank could legally impose. Financial deregulation enabled banks to slough off low-income customers even as it created new opportunities for storefront profit-taking.

People living from paycheck to paycheck, with little surplus to buffer emergencies, occasionally need to borrow money, whatever the interest rate. That rate is typically as high as state laws allow, and short-term loans are designed to encourage rollovers that result in ballooning interest.

Payday-loan operations that require borrowers to sign over a share of a future paycheck have proliferated in poor neighborhoods and surround many military bases, as do offers to make short-term loans secured by the title to an automobile. A two-week payday loan with a fee of $15 per $100 — which Baradaran describes as typical — is equal to an annual rate of about 400 percent.

Poverty is expensive, even for those who aren’t debt-laden. The average family earning $25,000 a year but without a bank account spends about $2,400 a year — more than it spends on food — on financial transactions. Even those who manage to open regular bank accounts face disproportionately large fees and harsh penalties for small overdrafts.

Some states have been more successful than others at protecting low-income consumers, and the federal Consumer Financial Protection Bureau is now providing some oversight. But cross-state comparisons suggest that outright ¬prohibitions on “fringe banking” don’t necessarily help, because ¬low-income families desperately need access to credit, even at high cost.

Many critics worry about excessive reliance on finance in the United States. But financialization itself may be less important than the particular form it takes. Baradaran argues persuasively that the banking industry, fattened on public subsidies (including too-big-to-fail bailouts), owes low-income families a better deal. She recounts the slow but steady demise of “banks with souls” — the ¬community-based banks and credit unions that have been displaced by larger institutions better positioned to take advantage of economies of scale. The six largest banks in the United States, she notes, now hold almost 70 percent of all the assets in the financial system.

Banking in the past was not nearly as dispiriting. In 1861, Britain mandated provision of basic financial services by local post offices; the United States followed suit in 1910. Postal banking, as it was called, proved particularly beneficial for immigrant families and may also have helped stabilize the financial system in the early years of the Great Depression. Because other regulatory measures seemed to make it superfluous, the program was discontinued in 1966.

Today, however, the global financial industry has little incentive to address the needs of low-income families. The time has come, Baradaran argues, either to restore a postal banking system that ¬offers greater accessibility or provide some ¬other public banking option.

If only the problems she describes were as photogenic as the ones Jacob Riis dramatized. “How the Other Half Banks” is well researched and clearly written, but its academic heft demands a long attention span. To be sure, it does speak effectively to another issue. The bankers who fully understand the system are heavily invested in it. Books like this are written for the rest of us.