In The Zeitgeist

This review is my second of a book about the Third Turning that I finally got around to reading in the Fourth Turning (the first is here). This second book is Broke, USA, about what the author calls the poverty industry.

I’m actually reading it on my Kindle:

It is one of the first models of Kindle, and it is full of ebooks, which I will probably need the rest of my life to read. So assuming I don’t lose the device (which I almost did once at an airport) and that it doesn’t break down, this will be the only ereader I ever own.

Broke, USA chronicles the rise, from the 1980s to present times, of financial services targeting people with low incomes and poor credit. The venerable example of such a service would be that provided by a pawn shop: a small loan using some valuable as collateral. Other early examples are auto title loans (putting your car up as collateral) and rent to own (buy a TV for five times what it should cost because you can’t or won’t save money).

But this industry really took off in the 1980s when ambitious entrepreneurs discovered how to tap into credit markets to profit off of the yield spread available when making risky, high interest loans to individuals with poor credit. All they had to do was convince the big lenders to give them access to the money. And so new services were born, such as the payday loan, backed by the promise of future income (just show them your pay stubs). And the “early tax return,” more accurately termed a refund anticipation loan, a sure bet for the lender because there is close to a 100% chance that the IRS will deliver the refund. Easy money because someone can’t or won’t wait three weeks for their tax refund.

These services end up being very profitable, because even though each loan is small, there are so very many of them, and the actual interest rate earned (APR as they call it) is insanely high. Storefronts offering these services popped up all over the country throughout the 1990s, and the men who founded these businesses became millionaires. The easy money they made attracted the attention of the billionaires, and soon these companies were subsidiaries of larger, more established financial corporations.

When I started this book, and read about the pattern of low-income workers caught in a revolving door of interest payments and fees, my first thought was that this was a story about Generation X in the Third Turning – a generation and an era of short-term thinking and risk taking. But as it turns out all the living generations are involved in this saga. Many of the entrepreneurs who pioneered this businesses are Boomers, while the corporate moguls who bought them out are, as you may well imagine, from the Silent Generation. The poor customers in this industry come from all generations.

And many members of the Greatest Generation became victims of what has become known as “predatory lending.” In a particular heinous practice known as “equity stripping,” lenders identify someone with a small fixed income (such as a Social Security pension) but with a home that is all or mostly paid off (perhaps because they are elderly and retired). If they can be convinced to take out an equity loan on their house in not very favorable terms, the lender essentially extracts some of the value of the asset. If they are not very financially savvy, or even declining in mental faculties, they can be convinced over and over again to refinance, transferring their net worth to the lender in the process.

This brings us to the mother of all predatory lending practices, the subprime mortgage. This is, of course, a mortgage loan made to someone with a poor credit rating, structured to pay out more money to the mortgage-holder in compensation for the risk. The now familiar story is that there was an explosion in the origination of these kinds of loans in the 2000s, to the point where anyone who could sign their name could get one. The mortgages were sold on secondary markets, bundled together to dilute or disguise their riskiness, and blessed by irresponsible credit rating agencies. When the inevitable wave of defaults began, the world economy was almost destroyed.

The generation whose archetypal role in this story proves most true to form is the Boomer Generation. From their numbers come the activists and politicians who have campaigned against predatory lending, and tried to regulate it. But also from this generation are the lobbyists for the lenders, and the politicians on the other side of the aisle. The author paints a picture of iniquity, but these practices do have their advocates.

The argument is that they offer access to basic financial services not normally available to people with no credit. Considering the circumstances they are in, someone who does not have a credit card might find it in their best interest to borrow a little cash despite the high surcharge. That cost is actually less than that of a bounced check, or a utility reinstatement fee. They are simply making a choice that is rational for them. Home buyers with low incomes and low credit might not be able to purchase a house at all if there were not subprime mortgages available. Why should the government deny consumers these opportunities and the freedom to choose?

When the Third Turning ended with the global financial crisis, the generations in America played their parts to the hilt. The Boomers politicized the issues involved and created two opposing camps, but failed to avoid the crisis. The Gen-Xers were at mid-life when the bubble burst, and they bore the brunt of the damage. And the Millennials learned from observation to be cautious about incurring debt.

Curiously, Millennial risk-aversion doesn’t apply to student loan debt, a topic which the author reaches at the end of the book. Student loans are being described as predatory now, extending the poverty industry into the solidly middle-class. Considering this along with record wealth inequality, anemic economic growth, and a difficult job market for young adults, the story of broke America has certainly not come to an end.