Quick Credit: Reregulation and the Welfare State

As the merits of creating a consumer financial watchdog were recently debates, one of points I often tried to make was that a new alternative financial sector had emerged almost overnight and it was largely unregulated. Rather than traditional banks, this “fringe” marketplace was made up of check cashers, payday lenders, auto title loans, and subprime mortgage sellers that sold expensive products and created a new set of problems for many families. Basically, those that traditionally had a hard time accessing mainstream financial services were looking for alternatives beyond those found at their main street bank. Their “demand” for credit ended up pushing them into the arms of a wide range of financiers, some of whom were intent on ripping them off and didn’t care if they could meet the terms of their loans. But it gets more complicated when you look at how the demand for credit among these families with low incomes and fewer resources interacts with the organization of our social welfare policies.

David Stoesz, a professor of Social Work at Virginia Commonwealth University, digs into these complex relationships in this important new paper. Stoesz gives a tour of what makes up the fringe economy, describes its relatively rapid growth, explains how different perspectives account for its emergence, and considers some of the holes social policy now needs to fill. These issues are particularly salient today, especially in the aftermath of The Great Recession.

One of the observations Stoesz makes is that the current configuration of our welfare state consists of three streams: some families receive public assistance benefits directly, many more receive cash as tax refunds, thanks to the refundable Earned Income Tax Credit, and others access resources through the alternative financial sector. Of course, one of the problems with how our social policy framework is constructed is that we allow some of the assets provided in the first two streams to be stripped by the third.

He notes:

“Financial products in this third steam have evolved with little, if any, concern for their social and economic effects or interaction with other elements of the Welfare State. Not only have these three streams evolved independent of one another, but their crosscurrents, roiled by the Great Recession, threaten to swamp many of America’s most vulnerable families.” 

So, we get over $40 billion in tax refunds thanks to the EITC but allow expensive Refund Anticipation Loans to grow into a $4 billion dollar industry for providing the “service” of expediting refunds by 14 days. That’s 10% right off the top of one of the country’s primary anti-poverty programs, and it’s a real waste of public resources.

In addition to having plenty of details on the rise of the AFS, the paper presents a justification for re-regulating the financial marketplace.  He writes, “Unregulated, the fringe economy functions at cross purposes to traditional social programs, subverting the ability of low-income households to become more economically self-sufficient.”

Therefore, we see how financial regulation serves a vital function within the American welfare state. However, regulation alone won’t integrate many lower-income families into the economic mainstream and deliver economic justice. If these are our goals, we will need to revisit the larger organization of the welfare state, and focus on how it can assist families enhance their economic well-being and move forward in their lives.

For those interested in the facts, figures, and conceptual discussion, you can find the full paper here.