Fringe, adj. not part of the mainstream; unconventional, peripheral. When this definition is applied to the economy it becomes the title of a book, Short Changed: Life and Debt in the Fringe Economy, written by Howard Karger, who at the time was a professor of social policy. ((Brumback, GB. “Review of the book Short Changed: Life and Debt in the Fringe Economy by Howard Karger in the book review section of Personnel Psychology 60″, 2007, pp. 787-790.)) Part 4 is a review of that book.
Do you have any idea what the “historical neighborhood banker” is? I didn’t until I read his book. It’s the pawnshop says Karger. Most likely not in your neighborhood, though. Indebted people have been pawning their belongings as long ago as 1000 BC. If your image of today’s American pawnshop is of a storefront operation owned and operated by a shady character, you’ll be as surprised as I was to learn that many of those storefronts have been gobbled up by five publicly traded corporations (e.g., EZ Pawn) raking in 100’s of millions of dollars yearly from pawnshop loans and with boards of directors lavishly paying their CEOs. Even the shrinking population of go-it-alone pawn shop brokers gets loans to set up their operations from big banks. Well, why not? No banksters worthy of the name will miss out on grabbing other people’s money.
Karger defines the fringe economy as “corporations and business practices [that pray on the poor] by charging excessive interest rates or fees, or exorbitant prices for goods and services.” He divides this economy into seven sectors and gives a chapter to each. Besides a storefront loan sector that includes pawnshop businesses, the other sectors are the credit card industry, alternative financial services such as check cashing and rent-to-own, fringe housing, real estate speculation and foreclosure, the fringe auto industry, and the “getting-out-of-debt” industry such as the multibillion dollar debt management business. Large corporations operate in each of these sectors, and some, like EZ Pawn, may not be household names, while other large corporations that operate in both the fringe and mainstream economies surely are, such as the really big banksters, Bank of America, Wells Fargo, Verizon, and then the telecommunications giant, AT & T, that depended on the banksters at the outset.
Karger fills his book with a lot of facts about his subject, so much so that he warns early on that reading them “may be tedious” yet necessary because the “devil is in the details.” He compensates nicely for them, though, by fleshing out the facts with many anecdotes. I couldn’t help but think how Charles Dickens might have novelized them into a modern classic, absent the debtor’s prison (see the next paragraph) in “David Copperfield.”
Karger’s name for the last sector, the “getting-out-of debt” industry surely has to be tongue-in-cheek, for as he describes and explains it, this industry can only be a multi-billion dollar business because its customers never get out of debt. Businesses in the other sectors, as he amply shows, are no different in that they all seek to sink already indebted people further into debt by escalating the interest fees levied on them, amounting in some cases to nearly a 500% APR! It would not be profitable to put these people in debtors’ prisons. Indeed, the entire sub-prime and predatory lending businesses of the fringe economy are built on the backs of persistently indebted customers.
Obviously, it would it not be profitable either to drive indebted people into bankruptcy, an escape hatch of last resort so to speak. This explains why corporations, especially in the credit card industry lobbied heavily to get the draconian Bankruptcy Abuse Prevention and Consumer Protection Act passed by a captive Congress. Known pejoratively but aptly as the “loan shark law,” Karger notes that it “intensifies the economic war on the poor and credit-challenged.”
If you are thinking loan sharks might starve if people stopped spending beyond their means you would be giving, in Karger’s opinion, too much credence to what he calls the “over consumption” argument. While he agrees that such “affluenza” (see De Graaf et al., 2002) is a contributing factor, he maintains that the argument fails to address a major cause of indebtedness, “the high cost of living in a privatized society.” ((John De Graaf, J. et al. Affluenza: The All-Consuming Epidemic, 2002.)) He notes that the rising cost of necessities amounted then to 75% of a family’s two-person income, leaving little left for luxuries for the “functionally poor.” Moreover, consumer spending is less than it was a decade ago then. The argument, he believes, lets lawmakers fault debtors “for an economic reality they can’t control.”
Besides its loan shark law, the government has boosted the fringe economy in various other ways. For example, what Karger means by a “privatized society” is that stricter federal and state public assistance policies more quickly than before throw former recipients into jobs with no benefits and with pay suppressed by the miserly minimum wage law that has been frozen at that time by conservative politicians since 1997. Another example is public policy on homeownership along with sub-prime mortgage lenders and their low teaser rates that lure unqualified customers to buy homes eventually foreclosed. And not to leave out the judiciary’s role, Karger cites a U.S. Supreme Court ruling that allows national banks to charge the highest rate allowable in their home states to borrowers living elsewhere.
What, you might ask, is the difference between the two types of lending, sub-prime and predatory? Is the first legal and the second not? No. Illegalities exist in both. Moreover, state usury laws vary, so what may be illegal loans in one state are legal in another. Ethical considerations certainly don’t differentiate the two types of lending. Unscrupulous but legal practices abound in both types. The difference between them Karger says is blurry, offering his own blurry view that the first is generally “beneficial” and the second is “destructive.” In my opinion the only difference may be in how excessively customers are gouged. It seems to me, moreover, that sub-prime loans can’t be beneficial because the effects of being gouged benefit only the gouger.
The profitability of the fringe market has been too tempting for mainstream financial institutions not to enter it. Some observers, Karger says, believe this development will help to counteract unscrupulous lending practices. Not a chance! Anyone who tracks big financial institutions and corporations in general should know that the profit to be made and the pressure to make it every quarter will compromise the means to make it. Karger is not “optimistic” either and offers some corroborating evidence by citing some very prominent corporations that entered the fringe market. Customers of this market represent what I would call our own undeveloped “sub-country,” so why should we expect it to be any less exploited than are undeveloped countries by multi-national corporations?
The solution, Karger thinks, is not to eliminate the fringe market, as if that were even a remote possibility! He also thinks it would not be desirable because compared to fringe services the mainstream ones are not as accessible physically or as culturally compatible to poor neighborhoods.
At the end of each sector’s chapter and in the concluding chapter, therefore, he suggests numerous solutions, some more plausible than others, that would accommodate the realities of these neighborhoods while also eliminating some of the abusive and fraudulent practices of doing business with the people who live in those neighborhoods. Many of the solutions, like lending “only to borrowers who have the income or liquid assets to repay the debt” (how plausible, though, is that for some borrowers?) could be voluntarily adopted by lenders. But business being what it is, whether in the fringe or mainstream economy, socially and genuinely responsible behavior is rarely volunteered. So Karger adds some legislative recommendations. In this sense his book is very timely. As I wrote the review, for instance, Congress was considering legislation to curb the excesses of the sub-prime mortgage business. But whatever Congress passes is academic. Anything Congress does is not done without the heavy hand of large corporations in the mix.
In Closing
Were it only true that the corpocracy and its capitalism were relegated to the fringe economy and then made to vanish to never-never land!