By Common Consent may seem like an odd place to review Mehrsa Baradaran‘s excellent How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy (Harvard University Press, 2015) [Amazon]. Although Professor Baradaran is Mormon, the book has little explicitly Mormon content (I mean, it does mention a couple of Sen. Wallace Bennett’s interactions with the regulation of banks, but that’s as close as I remember it getting).
That said, as Mormons, we’ve been encouraged to become informed and involved in our communities. And understanding banking, especially as it relates to the poor, is, if not absolutely essential to that charge, at least tremendously important.
And you can’t get through Professor Baradaran’s book without becoming more informed. Over the last half decade or so, a lot has been written about the financial crisis. And Professor Baradaran has made a worthy contribution to this crisis library. She doesn’t spend a lot of time retreading what I’ve seen in other books—she doesn’t really trace the machinations associated with determining whether to save the banks, and which banks to save, or the details of the financial instruments that blew up, or much of the current intrigue.
Instead, she lays out the history of banking, with a focus on its relationship to the state. Banks, she explains, have been controversial in the United States since its founding; they’re essential to grow an economy and put money where it needs to go but, by gathering money together, banks can accrue outsized power and influence.
Originally, banks in the U.S. were local; only during the Civil War, when the country needed lots more money than it had, banks really become national. And even then, they were tightly regulated. That regulation ensured both that the banks received necessary support from the government, and that the banks were roughly democratic in how the treated depositors and borrowers. Even with regulation, though, banks tended to shift power to urban areas and to the wealthy, at the expense of the rural and the poor.
In her book, Professor Baradaran traces several good banking movements (including credit unions and savings and loans) that were originally meant to provide banking services to a broader population than the banking industry did. She also traces the downfall of these various attempts, as they either transformed into the banks they were meant to supplement, or otherwise failed.
As deregulatory pressures mounted, the banks managed to almost completely shake their social-contract obligations toward the poor, leaving the poor unbanked and at the mercy of expensive and sometimes-unsavory fringe lenders. She explains in significant detail why this state of affairs is bad, and recommends a solution (postal banking, but you’ll want to read her book to understand why).
So far, so good, right? But how, you ask, does the history and policy of banking have anything to do with Mormonism?
Mormon discourse is tremendously wary of debt. In General Conference in April 1938, President J. Reuben Clark famously warned the Saints of the dangers of incurring debt:
Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours; it never has short crops nor droughts; it never pays taxes; it buys no food; it wears no clothes; it is unhoused and without home and so has no repairs, no replacements, no shingling, plumbing, painting, or whitewashing; it has neither wife, children, father, mother, nor kinfolk to watch over and care for; it has no expense of living; it has neither weddings nor births nor deaths; it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.
Church leaders have continued to encourage this kind of retiscence around debt—essentially counselling us to avoid it as a form of bondage. In reaction to the economic realities of our time, though, they’ve allowed that in certain circumstances—buying a home or a car or financing an education—debt may be necessary. But consumer debt, aside from these big-ticket items? No.
What struck me as I read Professor Baradaran’s book was how class-specific these exceptions are. Homes, cars, and higher education are things that the middle class and above acquire and finance. They are, in many cases, outside of the reach of the poor.
And the poor aren’t using debt to fund excess consumption. They’re borrowing money (at exorbitent rates) to pay their rent, to buy food, to smooth their spiky income. They’re borrowing to meet financial emergencies—more than half of Americans couldn’t get $400 without selling something or borrowing money.[fn1] They’re perfectly aware that debt—and that borrowing from usurious fringe lenders—is not ideal. But they’re stuck: they need their housing, their medical care, their food, their car.
That’s not to say that Pres. Clark was wrong—he’s absolutely right that we should avoid debt to the extent possible. But it strikes me that this proscription on debt should be one of those inward-looking things. That is, even as we personally avoid debt, we also need to recognize the importance of being able to access money. As we look to alleviate poverty, we need to consider policies that will ease the poor’s access to borrowing. We shouldn’t let our personal ethic of avoiding debt bleed into a broader societal ethic.
Back to How the Other Half Banks: it is well-written, fascinating, and important. I can’t recommend it highly-enough. It’s essential if you’re interested in the barriers that the poor face or how to alleviate them. But it’s also an essential introduction to a world many of us don’t inhabit, a book that can open our eyes to the world around us.
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[fn1] The other month, we spent more than that in emergency room copays. We were fortunate both we could pull that money out of our savings account and that we have health insurance (because it would have been thousands, not hundreds, without insurance), but we didn’t have any choice but to come up with that money. That is, overshooting $400 isn’t that hard.
By Common Consent, a Mormon Blog 
Looking forward to reading this. Thanks.
“As we look to alleviate poverty, we need to consider policies that will ease the poor’s access to borrowing. We shouldn’t let our personal ethic of avoiding debt bleed into a broader societal ethic.” I’m probably not following what your saying but borrowing money just to eat says there are much bigger problem than access to money. When you borrow you say I am willing to pay more for something to have it now. You can’t live on borrowed money… it doesn’t work. At some point you have to pay and pay more than original cost. This doesn’t work if your never going to have the money…If income is lumpy better to save and smooth it than to borrow.
Here is my simple principle. Those who understand interest earn it, those who don’t pay it.
Greg, I find your comment infuriating. The problem with the poor is not that they don’t understand how interest works; let’s not add insult to injury by insulting their intelligence.
Exactly, Julie. Greg, you’re ignoring the entire post. Your comment might be applicable to a generalized group, all else being equal, but we don’t live in a world like that. You don’t think that poor people know that payday loans are a ripoff?
Greg, I could probably leave it at what Julie and Steve said, but I’m going to expand it a little. Nobody’s talking about living on borrowed money; rather, access to affordable borrowing would make a huge difference to people who have a financial emergency (seriously, $400 is a huge amount for more than half of Americans, and my family managed to rack that up with two emergency room visits that we couldn’t have avoided). With payday loans, that $400 of borrowing becomes a huge amount (Prof. Baradaran lays out how many times people usually roll their payday loans over, and how much interest they pay); I could borrow that money much more cheaply. That doesn’t make the loan costless, of course, but it allows me some room to breathe.
And this:
is pithy, but it’s not true. Most banks and investment funds lever up (that is, borrow money) significantly, because returns are better if you’re leveraged.
And borrowed money is how most of us who have any wealth create it—for most middle-class Americans, the bulk of their net worth is tied up in their homes, which they borrowed to buy. Their kids will stay in the middle class because they borrow money to go to school.
And there are other corporate reasons to borrow, too. It’s an easy way for multinational corporations to reduce their US taxes. Because of the tax law, it’s actually less expensive for a corporation to borrow and pay interest (which is deductible) than it is to get equity financing and pay dividends (which are not deductible).
We’d probably be better off systemically if we didn’t depend so much on debt. But it’s necessary for many purposes, and helpful for others, so let’s not pretend that we, who don’t need to borrow to pay our bills or deal with emergencies, are better than our brothers and sisters who aren’t as fortunate (and lucky) as we are.
Julie,
Actually you shouldn’t take my last comment as directed toward the poor, most of the poor in the US and the world don’t have any debt because no one will lend them money. If I’m insulting anyone’s intelligence (which I didn’t mean to) if would be the middle to upper class who hold most of the consumer debt. Most folk in the US don’t live this principle which means they don’t really understand it.
A two year old interview with the book’s author:
http://aspiringmormonwomen.org/2013/10/02/career-day-law-professor/
“most of the poor in the US and the world don’t have any debt because no one will lend them money.”
This is false. They have plenty of debt.
Your statement that it’s middle-to-uppers who hold most of the consumer debt is also misleading; it’s perhaps true as a percentage of the total debt number, but probably not as a percentage of income.
Actually, I’m wrong about that last part. Sorry. However, families that earn more are able to save more, and higher earning families also have access to superior lending terms.
We should perhaps separate the banking issues of the poor from the problem that our economy has not produced jobs the poor typically are able to take. There are numerous reasons for this. Partially health care issues. Partially problems of geographic mobility. But mainly problems with our economy in job production. A lot of the debt of the poor (but not all) arises from barely making it paycheck to paycheck. When you absolutely need something and your only choice is high credit (payday loans, title loans or credit cards) of course you’ll end up in debt. The solution to this is primarily better jobs though.
This isn’t to deny the importance of making cheaper credit for lower income people more widely available. Right now credit to large business is ridiculously easy and cheap. Credit to small business, especially the types of businesses the poor are able to set up, is ridiculously constrained. Oddly few addressing the issues on either the right or the left are focused on this.
I’ve not read the book but noting that high interest short term lending arose because regular banking wasn’t meeting the need recognizes the problem with supply and demand. That said, there’s also reasons why banks don’t want to supply that type of credit. Government programs to incentive certain behaviors such as home ownership are also not necessarily beneficial when the unintended consequence is making mobility more difficult. Especially in regions without a diverse economy.
Clark, I’ve only broadly summarized the book. She goes into detail about the various reasons that banks don’t lend to the poor, including the fact that it’s not nearly as profitable as lending to the rich. That is, the regulatory and servicing costs of a loan are similar whether it’s for $500 or $500,000.
And better jobs is clearly the best solution; unfortunately, it’s a really hard one to implement. In the meantime, providing non-usurious loans to the poor can be a valuable stop-gap measure; like you said, for the banks, money is cheap, and if the poor want to create businesses or get education that will help them escape poverty, they realistically need access to capital.
Does this book go as far as offering solutions that we can implement at an individual or local level or is it mainly pointing out the problem and offering high level solutions?
I enjoyed the review, Sam. And not since bus orgs have I been reminded that debt is cheaper than equity.
FYI, Mehrsa is the guest on today’s Slate Money podcast, which spends its full time discussing banking for the poor. You should definitely listen.