No Slack: The Financial Lives of Low-Income Americans - Hardcover

Barr, Michael S.

Hardcover

ISBN 10: 0815722338 ISBN 13: 9780815722335

Verlag: Brookings Institution, 2012

Inhaltsangabe

The financial crisis exposed the potentially unsavory results of the interaction between low- and moderate income households and alternative and mainstream financial institutions. Many households were overleveraged or paid high costs for financial services, while others lacked access to useful financial products that can cushion against economic instability. The financial services system is not well designed to serve low- and moderate-income households, leaving them without financial slack: they did not have adequate breathing room for making the financial adjustments that would permit them to better meet their own needs. No Slack shows us why these families were the least prepared to handle the shock of the deep recession.

This pivotal analysis focuses on the Detroit metropolitan area's low- and moderate-income neighborhoods, which are similar to those of other Rust Belt communities. The Detroit Area Household Financial Services study—conducted at the height of the subprime lending boom—examines these households' decisionmaking processes, behaviors, and attitudes toward a full range of financial transactions.

No Slack reveals widespread problems in home mortgage lending, the common threads among people who file for bankruptcy, the reasons so many households are unbanked, and how behaviorally informed financial regulation can make the market work better. Drawing on his deep policy experience, Michael Barr advocates helping families seek financial stability in three primary ways: enhancing individuals' financial capability, using technology to promote access to financial products and services that meet their needs, and establishing strong protections for consumers.

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Über die Autorinnen und Autoren

<div><p><b>Michael S. Barr</b> is a professor of law at the University of Michigan Law School and a nonresident senior fellow in Economic Studies at the Brookings Institution. In 2009&#150;10 he served as assistant secretary for financial institutions with the U.S. Department of the Treasury, and he was a key architect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.</p></div>

Michael S. Barr is a professor of law at the University of Michigan Law School and a nonresident senior fellow in Economic Studies at the Brookings Institution. In 2009–10 he served as assistant secretary for financial institutions with the U.S. Department of the Treasury, and he was a key architect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

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NO SLACK

The Financial Lives of Low-Income AmericansBy MICHAEL S. BARR

BROOKINGS INSTITUTION PRESS

Copyright © 2012 THE BROOKINGS INSTITUTION
All right reserved.
ISBN: 978-0-8157-2233-5

Contents

Chapter One

Introduction MICHAEL S. BARR

Low-income individuals often lack access to the type of financial services that middle-income families can take for granted, such as checking accounts, direct deposit, bank loans, or saving opportunities. High-cost or low-function financial services, barriers to saving, lack of insurance, and credit constraints increase the economic challenges faced by low-income families. Using a unique data set from a survey I designed and that was administered in 2005–06 by the Survey Research Center at the University of Michigan to more than a thousand households in the Detroit area, this book analyzes the financial constraints and choices of low-income families and describes the ways low-income families use financial services, through both formal ("mainstream") and informal ("alternative") financial institutions. It discusses policies that would help low-income families achieve more stable economic lives.

Access to affordable financial services is important to the lives of low-income families, who must deal with sometimes abrupt fluctuations in income that occur because of job changes, instability in hours worked, medical illnesses and emergencies, divorce or other changes in family composition, and many other factors. If these families have limited access to savings, credit, or insurance, even small income or expense fluctuations may create serious problems in their ability to pay rent, utilities, and other bills. That is because many low-income families often lack the financial "slack" that can permit other households to ride out tough times (see Mullainathan and Shafir 2009). Financial slack can be thought of as breathing room provided to households by the ability to make relatively costless adjustments to align resources with needs. The costlier or more difficult these adjustments are, the less slack these households can be said to have. Some amount of slack can be generated internally (as by increasing work, reducing nonessential expenditures, or selling assets), but generally speaking, households use the financial system to facilitate slack (as by holding savings, accessing credit, or buying insurance). No slack too often means that small problems can escalate rapidly and undermine the fragile financial stability of these households.

Unfortunately, families often have only limited access to the sound financial products that could help them generate financial slack. In fact, higher-cost financial services can reduce the slack available to households. For example, many low-wage individuals see their take-home pay reduced by the high transaction costs they face when using check-cashing services to obtain their income. Moreover, inadequate access to financial services—such as direct deposit to a bank account or its functional equivalent—can contribute to taxpayersâ€(tm) using refund anticipation loans and expensive check-cashing services that diminish the value of the earned-income tax credit.

Limited access to mainstream financial services can also hinder the ability of low-income families to save. Savings are important because they help to smooth short-term income and expense fluctuations. Small savings can be used to provide a buffer against unforeseen events, such as illness. Savings can also provide capital for important long-term investment opportunities. Middle- and upper-income families regularly use their savings to invest in educational opportunities, in the health of family members, in home ownership, and in pension funds for retirement; lower-income households face similar types of needs, including job training, higher education, or other strategies to improve their income prospects. Having a measure of financial stability through savings may also improve other outcomes, such as job training or education, both for heads of household and their children.

Constraints on access to mainstream financial services can also increase borrowing costs. The ability to borrow on reasonable terms can be important to low-income households for several reasons. Low-income households facing fluctuations in income and expenses may need to resort to high-cost borrowing because they lack lower-cost ways of generating financial slack. It is not easy for them to reduce expenditures; because of low asset holdings, low income, low credit scores, or thin credit files, it is often difficult for them to get access to lower cost debt; they may lack insurance; and they are less likely to have precautionary savings. They may be able to fall back on friends and family for help, but such borrowing can often put strains on those who lend, who are likely to be lower-income themselves. Access to credit can also be important beyond meeting short-term needs, for achieving educational goals, including vocational or job training. Access to reasonable terms for mortgages also facilitates more sustainable home ownership.

Generating Slack: Financial Services, Savings, and Credit

Transactional services, savings, and credit are critical for low-income householdsâ€(tm) financial stability. Because these households have no slack in their lives, small decreases in income or increases in expenses can cause major problems. Yet well-designed and appropriately regulated financial services could help these households build greater financial stability. Better access to transactional services, savings vehicles, and reasonable credit will not, in and of itself, transform the lives of low-income individuals, but better access would give households useful tools to manage their finances in order to generate financial slack. If households are able to set up a regular means to receive income and pay bills, to build savings, and to access reasonably priced credit, they would be less vulnerable to serious disruptions stemming from income and expense shocks, and perhaps better able to take advantage of new opportunities, such as job training, improved child care, or a better job.

Transactional Services

A quarter of low-income households, and 13 percent of moderate-income households, are "unbanked," that is, they have neither a checking nor a savings account (Bucks and others 2009; FDIC 2009). In lieu of bank-based transactions, savings, and credit products, these households often rely on more costly alternative financial services. Providers offer a wide range of services, including short-term loans, check cashing, bill payment, tax preparation, and rent-to-own products, most often in low-income urban neighborhoods.

Alternative financial services providers are the only source of basic financial services for many low-income persons, but those services come at a high price. For example, while check-cashing outlets offer essential services, the fees involved in converting paper checks into cash are high, relative both to income and to analogous services available to middle- and upper-income families, such as check deposit into a bank account or electronic direct deposit. Check-cashing fees vary widely across the country and between types of checks, but they typically range from 1.5 to 3.5 percent of face value. The Federal Reserve reports that financial institutions processed checks totaling nearly $31.6 billion in 2009 (FRS 2010). Almost all of these checks are low-risk payroll (80 percent) or government-benefit (16 percent) checks (Bachelder and...

Details zur Ausgabe

• Verlag: Brookings Institution
• Erscheinungsdatum: 2012
• Sprache: Englisch
• ISBN 10: 0815722338
• ISBN 13: 9780815722335
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 294
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar