25.6.19

JULIA'S MANIFESTO.

I used to be involved with economic education as university outreach, which inter alia involved equipping teachers with materials to develop financial literacy in their students, in order that the students (including collegians) not be fleeced.

The Council for Economic Education provided a lot of that material.  They worked closely with the Federal Reserve and with the traditional banking companies, which provided materials, and sometimes contributed money and speakers.  That was sometimes a sore point with me, as I perceive the traditional banks as discouraging small savers, such as youngsters, and anyone without at least a thousand bucks to park for a long time.  Yes, I understand there are transaction costs, and quantitative easing has made the passbook account a joke, but still, if the kids can't put a few bucks away each month without having them dissipated in maintenance fees, they'll likely keep their coins in a piggybank or a used spaghetti sauce jar.  "Those stashes are temptation to thieves, they represent money sitting idle, and a relationship with a deposit-insured bank is a step away from the check-cashing and payday-loan institutions that too often are the poor person's only contact with the financial system."  The banksters don't like those manifestations of the poverty industry, or perhaps they'd just as soon not take the risk that a kid will cash out that $100 that has built up over a year for Christmas shopping and start building it up again.

What happens, though, if it's more than the banks discouraging the risky customers, what if those check-cashing and payday loan companies are in fact beating out the banks for the business?  That's the thesis of Lisa Servon's The Unbanking of America: How the New Middle Class Survives.  Here we are halfway through the year and I'm rolling out Book Review No. 2.  (I still haven't perished, despite not publishing: perhaps there's something in concentrating on building that railroad or learning how to bid a game that can be made with some overtricks rather than worrying about how many book reports I put up (or about national affairs?)


Unbanking is the result of resourceful ethnography.  Professor Servon's affiliation is city and regional planning at Pennsylvania, and her work, which involved openly admitting to being an academic doing research and hiring out at check-cashing and payday-lending companies, cleared all the relevant human subjects reviews.

She discovers that many of the customers of the substitutes for conventional banks like them for a number of reasons.  Some might be innocuous: a tradesman gets paid by a client, and there are vendors who want to be paid in cash now, and working off a float is risky (if it's Friday, the bank might not get around to "depositing" the check until sometime on Monday, with a hold of several days, in which time the checks to the vendors come in and bounce) and it's worth giving the check casher what looks like a steep fee to a person with liquidity who hasn't learned the hard way about how banks "process" incoming checks in such a way as to deplete the account with the first one, then imposing the bounced check charges on each of the other checks; and then it's on the tradesman to make the case to the bank that the funds are there, just being sequestered.  Likewise, a person with a steady income gets that surprise car breakdown or broken tooth, which the payday lender covers (again, with a steep fee, but with no questions asked, and the fee is a one-off, rather than the slow drip of maintenance fees that might have prevented that person from establishing a "savings relationship" with a traditional bank.)  There's even a "credit counselor" at a traditional bank, page 31, who sometimes refers low-liquidity clients to a check casher.

There is additional custom for the alternative financial institutions that might not be so easily understood.  The author likes to present some of her conversations with co-workers and clients first in Spanish and then in translation.  Perhaps that's a nod to diversity.  On the other hand, that might mean any of new arrivals to the country, not yet involved in the formal economy, or not properly arrived to the country, or working off the books, and the skimpier the paper trail, the easier it is to hide.  Likewise, a tradesman who is paying a vendor in cash might be evading taxes, if in a small way, or perhaps there are people being paid, in cash, without the requisite pay stub.

In addition, there are informal credit collectives (these even have an acronym, ROSCA, for "rotating savings and credit associations") that serve a variety of purposes, including making liquidity available to people whose faith tradition frowns on borrowing or lending at interest; and, for all I know, there are still bookies and loan-sharks that provide liquidity.

On one hand, we may have these alternatives to standard banking because, as the author suggests, regulation of the standard banks has made the banks into a traditional cartel (are you surprised?) and the individuals whose story she tells just aren't financially fit enough for the cartel to deal with them.

On the other hand, fifty years of "progressive social change" might have rendered large numbers of people (there's room for further research, in that the "new middle class" of the subtitle might well be the "new lumpenproletariat") illiquid and devoid of life management skills.  That's where my "Julia" reference comes in.  Professor Servon's policy fix has nothing to do with the financial sector per se.
In order to make financial health a reality for all Americans, we need to ensure that anyone who works hard for forty hours a week can earn enough to support a family. We need to provide everyone with the opportunity to work and a strong safety net that will help people manage when work doesn't work. We need to provide stable housing and affordable health care, so that one illness or one accident can no longer send a family into debt so deep, they cannot get out.
Good luck with that. The clientele of the various non-bank financial services doesn't exactly look like the households of the American HighSo much for that family wage.  The professor might as well ask for a unicorn.  Even if it's a unicorn with financial disclosure labels on it that read like the nutrition disclosure labels on your potato chips.

(Cross-posted to 50 Book Challenge.)

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