“The financial crisis of 2008 crushed families, businesses, and the real economy, and laid bare core failings of the financial system. For the one in seven Americans who lives in poverty, or the millions of Americans who live in fear of falling out of the middle class, these times have been particularly devastating. These families were the least prepared to handle the shock of the deep recession. They had little or no savings to fall back on and stood one medical emergency or one major unexpected car malfunction away from a personal economic crisis. They had no financial slack. Federal government policies helped to cushion the impact, but these households still faced huge setbacks. What these families were and are now seeking is some measure of financial stability,” argued Professor Michael S. Barr at a Ford Foundation convening on March 3, 2016.
At the convening, Professor Barr presented a concept paper prepared for the Ford Foundation, “Looking Back, Looking Ahead: Expanding Financial Inclusion to the Poor,” and participated in a discussion with Xav Briggs, the Ford Foundation’s Vice President for Economic Opportunity and Markets, who is also a professor of sociology and planning at MIT. The convening brought together experts from around the country to explore ways to expand access to financial services for low-income families.
In his paper, Barr calls for advances that help empower consumers, that harness technological innovation, and that are grounded with strong consumer protections. Financial education, product innovation and consumer protection ought to be based on core values: honesty, transparency, fairness, simplicity, inclusion, empowerment, and trust. Efforts in all three areas should be informed by behavioral economics: evidence on how consumers and firms behave in the real world.
The technological and product innovation that Barr advocates would make payments faster and cheaper; empower consumers to manage their finances, avoid unexpected fees (such as overdraft) and build emergency savings; and provide access to sustainable credit. Some examples of financial innovations highlighted in the paper include:
- Helping people set up savings accounts at tax time;
- Providing real-time payments and immediate good funds availability
- Financial coaching using technology, nudges, and better products.
Barr concludes that finance is critical to overcoming inequality and advancing economic opportunity, yet it too often reinforces or magnifies barriers. The paper highlights the need to work together to build a financial system that is safer, fairer, and better harnessed to the needs of the real economy.
Lindsey Anderson ’17, is a 3L at University of Michigan Law School.