Living in a Debtfare State
Household debt in North America has reached record levels owing to an unprecedented accumulation of consumer debt. In the United States, student loans total more than $1 trillion – more than all auto loans and credit card loans combined. Since the 1990s, a particularly pernicious form of debt has emerged. “Payday loans” are short-term loans taken out by people who need a few dollars to tide them over until their next paycheck arrives. Issued by private lenders, payday loans often come with annual interest rates that average 400 per cent.
Today, growing numbers of the working poor routinely use consumer credit to cover daily expenses, and many fall behind on their payments. Because harsh penalties are attached to late payments, the debt load quickly adds up and plunges the already cash-strapped borrower into deeper financial trouble. This scenario is being repeated hundreds of thousands, perhaps millions, of times.
“All this debt, and by extension, the underlying credit-fuelled growth that dominates the global economy, is clearly destructive of people’s lives and a threat to the global economy, yet why is it that little is being done to fix this new normal?” asks Susanne Soederberg.
Soederberg is a professor and Canada Research Chair in Global Political Economy of Development in the Departments of Global Development Studies and Political Studies. For the past 15 years, first at the University of Alberta and now at Queen’s, Soederberg has been exploring the institutional and regulatory landscape of global finance and how it affects democracy, economy, public policy and the lives of everyday people.
“Although economists, the media and scholars represent finance as a technical, natural and apolitical phenomenon best left to the experts to manage and explain, its core component – privately-created money (credit) – is highly political,” says Soederberg. “People need to know the politics of how the system works and why it breaks down. Financial analysis is too important to be left to economists and their reliance on mathematical models.”
In her fourth and most recent book, Debtfare States and the Poverty Industry, Soederberg explores the legal mechanisms through which more and more people in the United States and Mexico have become reliant on expensive forms of credit (“debtfare”) to augment or replace living wages. There is no simple explanation for the phenomenon, but part of the answer involves what is known as “financial inclusion” – a concept purveyed by powerful financial institutions like the World Bank, which argue that the best way to reduce or eliminate poverty is to provide widespread access to formal credit through vehicles such as micro-loans. This, say advocates, enables people to start small businesses that provide a livelihood for them and their families. In reality, says Soederberg, “financial inclusion just gives everybody an equal opportunity to get into debt.” Soederberg is now turning her attention to the problem of affordable housing for the world’s poor through an incipient research project of slum rehabilitation in Mexico City, Manila and Mumbai. As is the case elsewhere, national governments in Mexico, the Philippines and India claim that neither they nor public donors have sucient funds to pay for the sheer volume of housing needed to provide a basic right to shelter for their most vulnerable populations.
As a result, institutions such as the UN-Habitat are proposing that low-cost mortgages be made available to the slum dwellers so that they can afford their own homes. In turn, these mortgages can be bundled en masse as residential mortgage-backed securities (RMBS) and sold in the global marketplace to investors such as public pension funds.
The proponents of RMBS typically portray them as a winwin solution that provides needy people with homes and investors with dividends. What troubles Soederberg is that RMBS are the exact same class of subprime investments that went sour in 2007-08 and triggered the global financial crisis.
“Will RMBS and other forms of private financing really resolve the issues they’re supposed to without the guarantee of living wages for the poor?” says Soederberg. “Who really benefits from these arrangements, and why?”
(e)Affect Issue 5 Spring 2014