Shortchanged: Life and Debt in the Fringe Economy

By Howard Jacob Karger

Book Overview

"An eye-opening read in the school of Barbara Ehrenreich's Nickel & Dimed . . . shines a bright light on the economy's darker side." --Publishers Weekly (starred review)

Drive through a low-income neighborhood and you're likely to see streets lined with pawnshops, check cashers, rent-to-own stores, payday and tax refund lenders, auto title pawns, and buy-here-pay-here used car lots. We're awash in "alternative financial services" directed at the poor and those with credit problems. Howard Karger describes this world as an economic Wild West, where just about any financial scheme that's not patently illegal is tolerated.

Taking a hard look at this fringe economy, Karger shows that what seem to be small, independent storefront operations are actually part of a fully-formed parallel economy dominated by a handful of well-financed corporations, subject to little or no oversight, with increasingly strong ties to mainstream financial institutions. It is a hidden world, Karger writes, where a customer's economic fate is sealed with a handshake, a smile, and a stack of fine print documents that would befuddle many attorneys.

Filled with heartbreaking stories of real people trapped in perpetual debt, Shortchanged exposes the deceptive practices that allow these businesses to prey on people when they are most vulnerable. Karger reveals the many ways this industry has run amok, ruining countless people's lives, and shows that it's not just the poor but, more and more, maxed-out middle class consumers who fall prey to these devious schemes. Balancing compassion with a realistic awareness of the risks any business faces in working with an economically distressed clientele, Karger details hard-headed, practical recommendations for reforming this predatory industry.

• Format: Hardcover
• Language: English
• ISBN: 1576753360
• ISBN13: 9781576753361
• Release Date: September 2005
• Publisher: Berrett-Koehler Publishers
• Length: 272 Pages
• Weight: 1.25 lbs.
• Dimensions: 0.9" x 6.3" x 9.6"

Customer Reviews

Excellent Book!

"Pawn shops, check cashers, rent-to-own stores, payday and tax-refund lenders, auto-title-loans, buy-here-pay-here used car lots - what seems to be small independent storefront operations turn out to be part of an economy dominated by well-financed corporations with little-no oversight and increasingly strong ties to mainstream financial institutions" - so claims "Shortchanged" summary material. The book then goes on to provide stories of real people trapped in perpetual debt, usually starting with overpriced goods, and acerbated by high interest rates and required extra charges. Karger admits that serving the poor can cost more, and thus would justify higher prices. However, he cites examples of pawning a vehicle for 1/3 its value and paying interest of up to and over 300%/year to get it back, depositing $100s-$1,000+ in low-interest savings accounts to acquired a secured credit card that charges 30%/year rates (and more) to use, check cashers paying 3% to cash relatively risk-free government checks - and concludes that clearly the line separating "reasonable" from "unreasonable" was crossed. Karger's material is well-documented, providing sources for his claims - eg. "almost 10% of unbanked households' net income is spent on alternative financial services,." "consumer debt, excluding mortgages, averaged about $19,000/family in '04," "68% of EITC and CTC eligible families use tax preparers (average cost $305 in '01; total of $1.3 billion vs. $EITC payouts of $30 billion." However, sometimes these claims, despite documentation, do not seem to hold water - eg. Karger states that the "bulwark of public assistance programs cost $125 billion/year or less (low-income housing, AFDC and its successor program, food stamps, WIC, school lunch), compared to check cashers, payday lenders, pawn shops, rent-to-own growing $78 billion in '01 - the problem is that the $78 billion did not appear substantiated by the detail. Information on how these purveyors of credit to the poor avoid usury laws is provided - eg. require a loan applicant to sell up to three household items to the lender, and then lease them back. The material on home mortgages for the poor was particularly eye-opening - balloon payments, shared appreciation mortgages (due at maturity), extra insurance fees, foreclosure "help" that often takes the customer's equity, and high interest rates (location, credit rating). Car sales (over-priced to begin with) that allow the seller to break-even in about three months, accompanied by a 30% repossession rate for "buy-here-pay-here" and frequent profitable trade-ins upon breakdown. (They even have companies that rent tires - at high fees and rates!) Debt counselors get about 15% from money paid to credit card companies - some counseling firms are reputable and provide good service. Others steer money towards the credit card companies, neglecting home mortgage and car payments. Only 26% complete the process. So, one wonders, if these firms are

Wake Up Call/Christmas gift

While Nickel and Dimed is an excellent read, in key ways it lacks authenticity. Barbara Ehrenreich, while attempting to live the marginal life, could always fall back on the resources of her "real" life, which she admittedly does on occasion. Her actions in these instances underscore the importance of Karger's book. Where do the actual poor, who can't step out of a temporary context, go when they need something to fall back on? As Karger so clearly illuminates, they must look to those who "have" and are anxious to give - at interest rates that guarantee the customer will be back, again and again. Karger's keen observation of the relationship between morality and economy may hit too close to home for those benefiting from the system. For those committed to reform of a predatory economy, he offers critical strategies for change. This book is an eye opener and a wake-up call to those of us who have not lost our moral center. On a personal note, my friends and family who will see themselves in this book - lured by the "easy" money of the fringe economy - have gotten this book as a PRE-Christmas present. I hope they read it before they borrow money they'll never to really be able to pay back to buy Christmas gifts they can't really afford.

An Eye-Opener!

I work with a client population that includes many individuals who are in recovery, often depressed and in need of coping skills to manage the grief of various calamities or social injustices. Inevitably their plight is exacerbated by financial woes, and I am learning to recognize the ominous influences of that downward spiral that leads to the "economic netherworld" revealed in Shortchanged! What an eye-opener! This view of "life and debt in the fringe economy" has really helped me appreciate the shadowy dimensions of consumer vulnerability that individuals and their families are encountering in the concrete jungle. Although I have passed by these small business establishments regularly, I have tended to ignore the pervasive presence of payday lenders, pawnshops, check-cashers, tax refund lenders and rent-to-own stores. I was shocked to learn that this $125 billion a year industry has more locations than MacDonalds, Burger King, Wal-Mart, Target, Sears and J.C. Penney combined! Karger's research of the alternative financial services that make up the fringe economy amplifies the importance of financial literacy and consumer education ... life skills that go well beyond merely finding a job and/or generating an income. This information should be incorporated into public education! Shortchanged is not "Nickel and Dimed" warmed over. While the author's vignettes may include trials of the working poor, this is a very different book. Definitely a challenge to critical thinking about the symbiotic relationships between predators and their prey!

The Underbelly of the American Economy

Shortchanged is essential reading for anyone concerned about economic justice in America. By chronicling the fiscal ravaging of America by check-cashers, sub-prime lenders, buy-here-pay-here auto lots, rent-to-own furniture and appliance stores, and the like, Karger details how predatory scams bleed the poor and working-class of vital income. Karger's reforms are logical and plausible, making the book within the best of the American Progressive tradition.

Best source for understanding the American consumer economy

In 1996 the Personal Responsibility and Work Opportunity Reconciliation Act transformed welfare to workfare, and the lives of the poor were radically altered. In 2001 Barbara Ehrenreich (Nickel and Dimed) showed us the health and housing woes of the working poor, concluding, among other things, that minimum wages must rise. Last year David Shipler (The Working Poor) expanded Ehrenreich's experience, concluding: ". . . [W]orking poverty is a constellation of difficulties that magnify one another: not just low wages but also low education, not just dead-in jobs but also limited abilities, not just insufficient savings but also unwise spending, not just poor housing but also poor parenting, not just the lack of health insurance but also the lack of healthy households" (p. 285). In this volume Howard Karger makes an amazing contribution to our understanding of the working poor. He moves beyond Ehrenreich's simple solution (give the poor more money and they will not be poor), and he avoids the scent of victim-blaming that clings to Shipler's work despite his sensitivity and compassion. Instead, Karger analyzes the alternative financial services sector, or fringe economy, and shows how it systematically stalks the poor, working poor, and vulnerable middle class. What is the fringe economy? Karger describes it as "corporate and business practices that have a predatory relationship with the poor by charging excessive interest rates or fees, or exorbitant prices for goods or services" (p. x). Laying aside the obvious counter-argument that high risk deserves high rates of return, who are the primary customers for the fringe economy? Karger notes that it is the 28% of American adults without a bank account, the 40 million Americans without health insurance, the 33.1 million foreign born residents, especially the undocumented segment, and the high debt, low asset segment of the middle class. Does high risk justify high rates of return? Secured credit cards assume no risk, yet charge high origination fees, high monthly service fees, and high interest rates. Pawnshops rarely loan up to 50% of the value of surrendered collateral with interest charges as high as 24% for a single month. Payday loans are secured by check or electronic debit with the debtor liable for criminal charges for non-payment and earn interest equivalent to 800% a year. In 2002 tax preparation services, refund loans, and check cashing fees related to government-backed Earned Income Tax Credits cost the working poor $1.31 billion. Rent-to-own stores routinely price furniture and electronics at more than double the prevailing purchase price. Independent used car lots do the same. The sad fact is that the fringe economy assumes almost no risk. Because the clientele does not have access to mainstream sources of credit, the fringe economy is able to set prices at will, and does. Whether one is looking at the credit card industry, used car sales, housing, telecommunications, or even the