If you want to know why Americans hate Wall Street so much, you should take a look at the “new frontier” of lending. That frontier, which banks hedge funds and investment bankers are putting money into, is making high interest loans to the poor.
Increasingly, these loans are taking on some of the characteristics of debt peonage. Debt peonage is a particularly nasty form of slavery; in which a person is forced to work to pay off a loan. Usually the loan is set up in such a way that the person cannot pay it off. Debt peonage, or bondage, has been described as “worse than slavery” by the United Nations.
Such lending in the United States takes the form of payday loans, and auto title loans. The New York Times Deal Book reported that an auto title loan taken out by a woman in the St. Louis area had a 171% interest rate. Big banks, bond funds, and private equity firms are investing heavily in subprime auto loans because of the high likelihood of a good return.
This paragraph from a Deal Book article by Jessica Silver-Greenberg and Michael Corkery is particularly frightening:
“In most parts of the country, a car is vital to participating in the work force, and lenders are betting that people will do virtually anything to keep their cars, choosing to make auto loan payments before paying for just about any other expense.”
High-Tech Debt Peonage
It’s not just title loans that can become debt peonage. Another Deal Book story detailed how auto lenders put wireless gadgets called Starter Interrupt Devices on cars. The devices allow the lender to shut down a car at the push of a button if a payment is missed. The car won’t start again until the money is paid.
The devices are installed in vehicles purchased with so-called subprime auto loans, a few of which come with interest rates of up to 29%. The devices can be used to control people’s movements. Deal Book reported on a woman in Texas whose auto loan contract prohibited her from driving outside of a four-county area.
Deal Book found that subprime auto loans are now a $145.6 billion business in the United States. It also discovered that insurance companies and big financial firms are investing heavily in bonds backed by subprime auto loans, a situation it compared to the mortgage crisis that caused the economic meltdown in 2008.
This situation weighs heavily on the poor. Times reporters found one couple living in a homeless shelter because they needed all their money to make car payments. That sounds like debt peonage.
The New Subprime Bubble
The Deal Book reporters think the car loan bubble could lead to a financial crisis that is similar to the mortgage crisis that could ultimately harm average Americans.
They found that the holders of the car loan backed bonds include mutual funds, pension funds, and insurance companies that control the retirement investments of average Americans. Banks are exposed too. Wells Fargo (NYSE: WFC) has $52.6 billion in outstanding car loans, 17% of which were made to persons with a credit score of 600 or less.
Like mortgages, the loans are repackaged into securities that are sold on the open market as bonds. They are often added to derivatives in order to give them a higher return. This is particularly troubling when U.S. Senator Elizabeth Warren (D-Massachusetts) is alleging that a recent federal spending bill contained a provision that would enable banks to invest funds from FDIC insured accounts in derivatives.
What’s truly bothersome is that the auto lenders increasingly target the poorest of the poor. One of their practices is to target those who have just declared bankruptcy because they cannot file for bankruptcy again for seven years.
Uber Gets into the Debt Peonage Business
An even more bothersome practice is promoted by taxi app company Uber Technologies Inc., which teams with auto dealers to offer car loans to persons willing to drive for it. BuzzFeed News reported on an Uber financing program that seems like debt peonage.
In the program, a man named Scott Eddy leased a Toyota Avalon for $1,200 a month. The car had a sticker price of $41,000, but Eddy would pay $66,000 to pay off the lease. What’s worse is the lease agreement, which says the car must be used “exclusively for business and commercial purposes as a livery vehicle to meet riders’ requests conveyed through Uber during the term of the lease.”
That by any other name is debt peonage – the driver has no choice but to drive for Uber if he or she wants to keep the car. It also obligates the driver to work himself or herself to death in order to get the $1,200 a month.
This Uber agreement comes dangerously close to being debt peonage, as described by the 1956 Supplementary Convention for the Abolition of Slavery, which described debt bondage as “the status or condition arising from a pledge by a debtor of his personal services or of those of a person under his control as security for a debt, if the value of those services as reasonably assessed is not applied towards the liquidation of the debt or the length and nature of those services are not respectively limited and defined.”
What else is truly bothersome is that Uber allegedly encouraged drivers to violate a California state law that requires a livery auto insurance policy (the kind of insurance required for taxi cabs), Buzz Feed News alleged. Uber reportedly did this by encouraging the drivers to get a regular car insurance policy, which violated both state law and the terms of those policies.
It looks as if the automobile, once a symbol of freedom and nobility, has become a trap with which to ensnare and enslave the poor. Income inequality is already taking the freedom of average Americans. One has to wonder how long democracy can survive if citizens’ freedom can be taken away so easily. If we value freedom, we’ll end this evil now.