Book Review - The Financial Times

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The Financial Times – 11/13/2015


Review: “How The Other Half Banks” by Mehrsa Baradaran
Book Review By Ben McLannahan -- Banking Editor for The Financial Times


Not long ago I spoke to Doris Edwards, a 50-year-old checkout assistant from Dallas, Texas. In 2010 she had lost her job as a trainer for a hotel chain, opted for bankruptcy to wipe out $50,000 of debt then turned to payday loans to rebuild her credit history. By 2017, she said, she’d be back on the grid.

What struck me was the matter-of-fact way she talked about the high cost of her loans. If she borrowed $500 for a month from an online lender, $630 would be taken from her account on the due day. If she wanted the money within 24 hours, she’d owe another $20. All in, she’d be looking at an effective annual interest rate of 360 per cent. She seemed happy enough with the set-up. “I like the option there if I need it — if I ever get in a bind.”

Avoiding short-term scrapes is never easy. Government studies show that more than half the households in America could not come up with $400 to cover a medical emergency without borrowing; and almost two-thirds lack enough savings to get by for three months if they lost their jobs. Many have bank accounts but patchy credit histories, so if something comes up they have to turn to short-term lenders who take a cut of a pay cheque. Millions more have no bank accounts so depend on pre-paid debit cards, pawnshops and companies that will use a car as collateral for a loan. None of these services comes cheaply.

It is a great irony, writes Mehrsa Baradaran of the University of Georgia School of Law: “The less money you have, the more you pay to use it.”

The title of her lean, angry book echoes the photojournalism of Jacob Riis, whose 1890 work on the slums of New York, How the Other Half Lives, spurred a housing reform movement. Where that was a lurid page-turner, this is polemic, dense with footnotes and lacking much original reporting. But the facts alone are compelling enough.

There are more payday lender storefronts in America than Starbucks and McDonald’s combined, Baradaran says. The typical customer is indebted for 199 days a year, often trapped in a cycle, taking out new loans to repay principal. The average unbanked family earning $25,000 a year spends more on finance than it does on food.

In the past, she writes, the US did a better job of serving the poor through banking. She starts with a historical sweep, setting out the origins of community-focused lenders, credit unions and specialised savings banks. But today, thanks largely to regulatory shifts that began in the late 1970s, big lenders bestride the continent, none of them that interested in low-income customers. Between 2008 and 2013, banks shut nearly 2,000 branches — 93 per cent of which were in poorer-than-average neighbourhoods, according to a Bloomberg study.

Many of the big banks were in effect bust at about the time of the 2008 Lehman Brothers crisis, Baradaran argues, but authorities rescued them anyway. They have since been boosted by daily shots of cheap money. Wouldn’t it have been great, she asks, if struggling individuals had been given a similar break?

“We do not ‘rise and fall as one people’,” she writes, echoing the words President Barack Obama used to justify the bailouts. “If two banking systems exist in America: government-supported banks that serve the well-off, and a Wild West of fringe lenders and check-cashing joints that answer the needs of everyone else.”

The book builds to a powerful proposition — that the US use its national Postal Service as a sort of central bank for the poor, offering basic financial services such as small loans and remittances. It is an idea backed by Bernie Sanders, a candidate for the Democratic presidential nomination, who notes that state-run postal banks have been a tool of financial inclusion all over the world. It is not exactly revolutionary: the US used the post office network to supply cheap credit to hard-luck cases during the Great Depression. But the programme was stopped in the mid-1960s, after other reforms seemed to make it unnecessary.

In a society built on credit as a means to wealth, low-income families deserve a much better deal, Baradaran argues. People do not opt for expensive products because they do not know any better, or are somehow reckless or irresponsible. They do so because they have no choice. And that is a national embarrassment.