ECONOMICS OF POVERTY-While many consider poverty to be a social condition it is primarily an economic condition. The economics of poverty have been ignored for many years. There can be no solution to an economic problem when it is not identified as an economic problem. The failure to understand this economic system that drives the continuous poverty in areas such as South LA are key reasons that solutions are difficult to implement.
The great recession that occurred in 2008 was a great depression for those in areas such as South LA. While major financial institutions were able to engage in predatory and subprime lending to real estate owners within low-income areas, these practices were clearly contrary to the banking rules that existed even at the time they happened. While millions were induced to accept loans that they could not afford, the banks knowingly gave money so that they could extract unconscionable fees and commissions.
Now the same banks are reaching settlements with local, state and federal governments to pay penalties for having ruined the lives of millions of people but the lives are already ruined. These penalties and settlements represent pennies on the dollar for the money stolen from the poor, uneducated and easily deceived that could not afford these loans. It was clear at the time these loans were made that many people receiving them would be unable to repay them. The penalty for such failure to repay these loans was a loss of the home that was used as collateral. What if bank robbers only had to pay back 25% of the stolen money if caught with no jail time? We would have an epidemic of bank robberies.
The new subprime loan being pushed in areas, such as South LA, are now automobile loans. These subprime loans are provided to those who have no credit and insufficient income to realistically expect they will be able to repay the loans. This is once again called predatory lending. The lender preys upon those with a lack of knowledge in order to induce them to accept unfavorable financial terms, which are generally hidden in long complex contracts.
People continue to use subprime lending for cars because they need cars in Los Angeles to get to their jobs. Not only are the interest rates substantially higher, often as high as 30%, but the used car dealer sells them the car for twice the value of the car. In other words, a car worth $5000 is sold for $10,000 with a 30% interest rate. Over the three-year repayment of this loan for this overpriced car, whose quality is also questionable, a poor person will pay 3 times the value of the same automobile. If you fail to pay, they take the car and sell it to another desperate buyer.
The proliferation of the payday loan industry within California is another example of how businesses are able to take advantage of the uninformed, uneducated and desperate consumers within a low-income area. The payday loan industry is a reminder of the days of "loansharking" whereby less than scrupulous lenders would provide short-term loans to those in financial trouble at exorbitant interest rates.
The interest collected by loan sharks was not substantially different than interest rates collected by the payday loan industry. Loan sharks were considered gangsters but payday loans are considered part of the ordinary economic order today. Government licenses them to collect interest rates up to 200% per year. If you fail to repay their loan you will find large dangerous looking people showing up at your door in order to encourage you to pay that loan.
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These companies depend upon the fees generated by the failure of the borrower to be able to repay these loans in a timely fashion. The failure to repay these loans in a timely fashion means that your credit will always be bad. The fact that these loans are substantially more expensive continues to reinforce the poverty situation that the borrower started out with. They actually make the situation worse.
Like most low income communities the residents do not receive information that would allow them to make informed decisions about such loans. The media they rely on is the same one that is paid by the lenders for advertising. As long as the media is able to make a profit from its dereliction of duty, by failing to inform the public about the true costs of such financing, it will persist.
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(Clinton Galloway is the author of the fascinating book “Anatomy of a Hustle: Cable Comes to South Central LA”. This is another installment in an ongoing CityWatch series on power, influence and corruption in government … Corruption Watch. Galloway is a CityWatch contributor and can be reached here. Mr. Galloway’s views are his own.)
-cw