Experts on Demand Individual

Name: Gary A. Dymski
Category: Opinion: How the Rich Get Richer
Title: Professor of Economics at the University of California, Riverside, and the Director of the University of California Center at Sacramento.
Degree:

Areas of Expertise: How The Poor Get Poorer: Business Practices Have Social Impacts

Favorable mortgage rates and free banking services seem to arrive magically with the new SUV in the garage and a decent-sized checking account. Families who are already comfortable in many ways get a free ride.

But the families who can't afford to pay are the ones hit with outrageous fees and interest on every financial transaction.
Does it make sense that a relatively wealthy person pays nothing to cash a check that costs a low-income person a $10 fee? That is today's reality, and it is widening the gap between rich and poor in a way that is dangerous to the stability of the nation.

Banks compete to offer financial services to households with savings accounts and expendable income, using mass sales techniques and centrally collected information. Transaction fees are routinely waived for high-balance customers. Poor households are shut out of access to large firms, and are served by marginal businesses, often operating in minority communities. They have to rely on storefront check cashing services, pawn shops, grocery stores or money order firms, all of which charge much higher rates for their services.

The banking market was once highly regulated, with standardized products at regulated prices, and a huge, undifferentiated mass consumer market. Now this market has split into three. On top are the wealthy, who receive personalized service from specialist fund managers and investment advisors. The middle market, the new financial citizens, has access to more standardized borrowing, saving, and other financial-service options than ever before. And on the bottom? Well, there is no service at the bottom. Those folks face financial exclusion. The "unbanked" are left with high fees, a vague sense of victimization, and few options to rise above their grinding poverty, except perhaps government assistance programs.

The same pattern is echoed on the lending side. Lenders compete to service upper-income households and established firms that have proven their "creditworthiness" to the satisfaction of some centralized computer. Those folks receive piles of credit card offers every day in the mail, completely unsolicited. By contrast, marginal borrowers must seek out credit informally. Small businesses must rely on trade credit, relatives, and their owners' credit cards and housing equity; poorer households must turn to finance companies, to pawnbrokers, or to predatory lenders.

It is tempting to say that the ruthless logic of the market process alone rewards the swift and punishes the slow. But in many key markets, larger businesses receive explicit subsidies. For instance, one crucial housing subsidy is the federal income-tax deduction for mortgage interest and property taxes. This subsidy affects housing and land values nationwide, and is paid for by the middle- and lower-income households who pay a disproportionate share of U.S. income taxes.

Federal housing policies have deepened patterns of racial exclusion and fed a chronic housing crisis. Immediately after World War II, federal housing policies favored those seeking housing in largely white neighborhoods. Federal Housing Administration (FHA) mortgage underwriting, set up in the 1930s to stabilize and subsidize mortgage lenders, relied on explicitly raciest criteria until the mid-1960s. Since over half the home-purchase loans made in the 1950s in Southern California were FHA loans, tax benefits and FHA subsidies flowed heavily to residential areas that excluded non-white households.

Meanwhile, federal urban programs devalued homes in inner-city areas and destabilized many minority neighborhoods.
These federal housing policies echo to this day. Public housing units have been located primarily in lower-income, heavily minority areas. FHA loans promoted racial separation and, by favoring the suburbs, underwrote suburban sprawl.

There is some good news. The Fair Housing Act of 1968, along with the Equal Credit Opportunity Act of 1974, helped close the gap between rich and poor. Those laws made sure that brokers, builders, and lenders could not make a fast buck through racially discriminatory practices. That effort was broadened with the Home Mortgage Disclosure and the Community Reinvestment Acts in 1975 and 1977, which identified the overall sustainability of the community as a public value. This sort of public legislation is not a panacea � but points out that it is still possible to have beneficial social consequences in a properly regulated free market.

All businesses face uncertainty, and seek power in their markets. When they are able, businesses merge and consolidate operations to improve their bottom line. But despite the widely-expressed views of many federal officials and commentators, only a small portion of the recent bank merger wave can be explained by these institutions� search for economies of scale.

These mergers, which have closed 1.7 banks every business day between 1981 and the present, have brought only disadvantages for customers. There is solid evidence from consumer advocates and from the Federal Reserve that large banking firms charge uniformly higher fees than do smaller banks. Bank mergers almost invariably mean closing branches, cutting permanent personnel in the field, and increasing temporary staff in call centers, and headquarter back offices. This means, more employees in North Carolina, fewer in California.

In addition, my research shows that large merging banks are more likely to engage in racial discrimination in states in which they had no branch networks. So cutting down on normal customer dialogues with consumer and community advocates also increases the chance of racially discriminatory outcomes.

Since megafirms dominate consumer services, generating market winners and losers, those same firms need to pay some attention to the needs of lower-income consumers and small business. In fact, providing affordable housing, and appropriate credit, is only fair considering the pervasive government subsidies in these markets.

It makes no sense to increase the vunerability of the nation's poorest citizens, because hopelessness only breeds crime or a drain on public aid programs. Policy-makers in the world's richest country need to reexamine these policies, with the help of progressive thinkers in business and the university.

When are we going to stop making the rich richer, and the poor poorer?

Recognition: Gary A. Dymski is a Professor of Economics at the University of California, Riverside, and the Director of the University of California Center at Sacramento. He is the author of "The Bank Merger Wave: The Economic Causes and Social Consequences of Financial Consolidation." He wrote this opinion piece about the social impacts of financial business practices.

Languages Spoken: English

E-mail: gary.dymski@ucr.edu

Phone: (916) 445-5900

Preferred Media: Print, Radio, Video

Media Contact:

kris.lovekin@ucr.edu



Experts on Demand Individual
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But the families who can't afford to pay are the ones hit with outrageous fees and interest on every financial transaction. Does it make sense that a relatively wealthy person pays nothing to cash a check that costs a low-income person a $10 fee? That is today's reality, and it is widening the gap between rich and poor in a way that is dangerous to the stability of the nation. Banks compete to offer financial services to households with savings accounts and expendable income, using mass sales techniques and centrally collected information. Transaction fees are routinely waived for high-balance customers. Poor households are shut out of access to large firms, and are served by marginal businesses, often operating in minority communities. They have to rely on storefront check cashing services, pawn shops, grocery stores or money order firms, all of which charge much higher rates for their services. The banking market was once highly regulated, with standardized products at regulated prices, and a huge, undifferentiated mass consumer market. Now this market has split into three. On top are the wealthy, who receive personalized service from specialist fund managers and investment advisors. The middle market, the new financial citizens, has access to more standardized borrowing, saving, and other financial-service options than ever before. And on the bottom? Well, there is no service at the bottom. Those folks face financial exclusion. The "unbanked" are left with high fees, a vague sense of victimization, and few options to rise above their grinding poverty, except perhaps government assistance programs. The same pattern is echoed on the lending side. Lenders compete to service upper-income households and established firms that have proven their "creditworthiness" to the satisfaction of some centralized computer. Those folks receive piles of credit card offers every day in the mail, completely unsolicited. By contrast, marginal borrowers must seek out credit informally. Small businesses must rely on trade credit, relatives, and their owners' credit cards and housing equity; poorer households must turn to finance companies, to pawnbrokers, or to predatory lenders. It is tempting to say that the ruthless logic of the market process alone rewards the swift and punishes the slow. But in many key markets, larger businesses receive explicit subsidies. For instance, one crucial housing subsidy is the federal income-tax deduction for mortgage interest and property taxes. This subsidy affects housing and land values nationwide, and is paid for by the middle- and lower-income households who pay a disproportionate share of U.S. income taxes. Federal housing policies have deepened patterns of racial exclusion and fed a chronic housing crisis. Immediately after World War II, federal housing policies favored those seeking housing in largely white neighborhoods. Federal Housing Administration (FHA) mortgage underwriting, set up in the 1930s to stabilize and subsidize mortgage lenders, relied on explicitly raciest criteria until the mid-1960s. Since over half the home-purchase loans made in the 1950s in Southern California were FHA loans, tax benefits and FHA subsidies flowed heavily to residential areas that excluded non-white households. Meanwhile, federal urban programs devalued homes in inner-city areas and destabilized many minority neighborhoods. These federal housing policies echo to this day. Public housing units have been located primarily in lower-income, heavily minority areas. FHA loans promoted racial separation and, by favoring the suburbs, underwrote suburban sprawl. There is some good news. The Fair Housing Act of 1968, along with the Equal Credit Opportunity Act of 1974, helped close the gap between rich and poor. Those laws made sure that brokers, builders, and lenders could not make a fast buck through racially discriminatory practices. That effort was broadened with the Home Mortgage Disclosure and the Community Reinvestment Acts in 1975 and 1977, which identified the overall sustainability of the community as a public value. This sort of public legislation is not a panacea � but points out that it is still possible to have beneficial social consequences in a properly regulated free market. All businesses face uncertainty, and seek power in their markets. When they are able, businesses merge and consolidate operations to improve their bottom line. But despite the widely-expressed views of many federal officials and commentators, only a small portion of the recent bank merger wave can be explained by these institutions� search for economies of scale. These mergers, which have closed 1.7 banks every business day between 1981 and the present, have brought only disadvantages for customers. There is solid evidence from consumer advocates and from the Federal Reserve that large banking firms charge uniformly higher fees than do smaller banks. Bank mergers almost invariably mean closing branches, cutting permanent personnel in the field, and increasing temporary staff in call centers, and headquarter back offices. This means, more employees in North Carolina, fewer in California. In addition, my research shows that large merging banks are more likely to engage in racial discrimination in states in which they had no branch networks. So cutting down on normal customer dialogues with consumer and community advocates also increases the chance of racially discriminatory outcomes. Since megafirms dominate consumer services, generating market winners and losers, those same firms need to pay some attention to the needs of lower-income consumers and small business. In fact, providing affordable housing, and appropriate credit, is only fair considering the pervasive government subsidies in these markets. It makes no sense to increase the vunerability of the nation's poorest citizens, because hopelessness only breeds crime or a drain on public aid programs. Policy-makers in the world's richest country need to reexamine these policies, with the help of progressive thinkers in business and the university. When are we going to stop making the rich richer, and the poor poorer? Recognition: Gary A. Dymski is a Professor of Economics at the University of California, Riverside, and the Director of the University of California Center at Sacramento. He is the author of "The Bank Merger Wave: The Economic Causes and Social Consequences of Financial Consolidation." He wrote this opinion piece about the social impacts of financial business practices. Languages Spoken: English E-mail: gary.dymski@ucr.edu Phone: (916) 445-5900 Preferred Media: Print, Radio, Video Media Contact: Kris Lovekin kris.lovekin@ucr.edu 951.827.2495
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