How the Other Half Banks; Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran. Harvard University Press, 2015.
Mehrsa Baradaran’s book is part of the growing conversation about inequality. The American banking system, rescued in 2008 from a near collapse, has not been serving the banking needs of the less well off. And what Baradaran calls “fringe lenders” have stepped in to fill that gap, with mixed outcomes.
A relatively small number of American banking conglomerates have become private/public enterprises whose continued existence (‘too big to fail’) is guaranteed by a public entity, the Federal Deposit Insurance Corporation. However, their responsibilities – whom they serve and how they serve them – are left to be determined by the baking sector itself. Their regulation is, for the most part, limited to protecting them from adverse economic emergencies. At the same time, the big banks have abandoned what Baradaran calls their historic “social contract with the American people”
Community banks could once be found in almost every U.S. town, receiving deposits, making small loans, and generally meeting the banking needs of that community. The financial crisis that preceded the Great Depression in 1933 resulted in runs on these banks and bank failures. Measures were taken by the Roosevelt Administrations to shore up the remaining community banks. But the crisis had made banks, state and federal governments, and bank customers cautious; the FDIC, backed by the credit of the federal government, was able to reassure the banking public.
This banking crisis fostered a conversation about the future of banking. Supreme Court Justice Louis Brandeis was one of many who argued that banks should be thought of as public utilities. Most agreed about the importance of what they called unit banks, a bank operating in a single region only. This precluded the conglomerate banks of today’s banking world with their many branches.
After WWII these bank branches followed their customers and the housing construction industry out to the suburbs, leaving older neighborhoods without banking services. Into this void came what Baradaran calls “banks with souls,” banks committed to providing the services that traditional banks were no longer doing.
Credit unions grew out of the cooperative movement. They pooled community deposits and lent them out to that same community. Often they were sponsored by large employers; the U.S. Postal Service, for example, created a credit union for its employees in 1923. They financed automobile and other large purchases. Their purpose was to encourage the saver and help finance the consumer.
Savings and loan associations were more specifically for helping with mortgages. They prospered with the post-war building boom and home ownership. However, their long-term mortgage loans were at fixed interest rates but those loans were funded by more volatile interest rates on shorter-term deposits. Trouble came when the interest rates paid to the latter began to exceed the interest they charged. Thus the Savings and Loan Crisis of the 1980s and 1990s.
Most recently internet lenders have cropped up. They will likely be considered “fringe lenders” by Baradaran and other critics. They join an array of credit institutions that supply short-term loans: pay-day lenders, title loans for car buyers, pawn-shop loans, and tax refund anticipation loans. Much maligned these days, she points out that these fringe lenders are the only options for the seventy million individuals (estimate) who do not have access to other sources of short-term credit. Because these loans are frequently rolled over they are expensive. (The interest rates may be as high as 300%: Annual Percentage Rate). Prepaid cards are the newest form of credit and may be the most expensive with substantial fees for activation and ATM use built into the purchase price of the card.
But o.k., Baradaran points out that the $35.00 draft overcharge that most banks levy add up to even higher credit costs. Banks can and do arrange the order of the returned checks so as to maximize the overdraft charges. To amend Baradaran’s phrase, we might call them ‘banks with no souls.’
Banking in the absence of traditional banking services can be expensive. She estimates that this conversion of money from paycheck, to cash, to electronic currency, and often back to cash again may absorb as much as 10% of an individual’s annual income.
Baradaran contends that a good solution would be the return to postal banking, revising an older institution established in the early twentieth century. (One can still purchase postal money orders at our thousands of post offices. Branch banking?) Since 1968 Congress has repeatedly determined that the postal service should be profitable and, despite its long history of service to the American public, no longer dependent on revenue from the federal government. Postal banking might be the opportunity to solve its deficit problem.
There would be opposition to the reestablishment of postal banking, especially from payday loan operations, now also organized into big conglomerates. And we have recently had the experience with Fannie Mae and Freddie Mac, government sponsored enterprises that failed at public expense. Nor would postal banking be the community banking that Mehrsa Baradaran praised earlier in her useful book.