Economists are trained to think of the GNP and the Index of Wholesale Prices as statistical crystal balls. But for a more basic lesson in forecasting the financial future, they ought to stand next to David Lowis at the Palace Loan Co. on 47th Street near Prairie Avenue.
”We see things happening here, a recession or the beginning of a recovery, months before they show up on TV or in the newspapers,” says Lowis, who has been monitoring the nation`s economy from behind the counter of a pawnshop for almost half a century.
When he was 5, his father, Harold Lowis, took David to his South Side shop and stuck a broom in his hand, just as David`s grandfather had once started Harold on a pawnbroker`s apprenticeship. Now David`s 23-year-old son, Roger, is learning the business. One of his first lessons was a sure-fire method for diagnosing the health of the American business community.
”When our back room begins to fill up,” David Lowis notes, ”you know the economy is in bad shape.”
He turned to carry a phonograph into a rabbit warren of dimly lit storerooms. Floor to ceiling, their rough wood shelving was jammed with television sets and stereos, many of them long-outdated models, that Lowis`
customers had left as collateral for loans. Early last year, Lowis started running out of shelf space, which alerted his pawnbroker`s antenna that the economic downturn of 1991 might be a prolonged one.
Early warning system
Confirming that prediction, Lowis pointed to a long line of would-be borrowers queued up in front of a teller booth marked ”Loans.” For a year and a half now, there has scarcely been a letup in that daily parade, Lowis said.
Some of his customers clutched rings and other small pieces of jewelry they hoped he would take as security for the $20 and $30 loans that are the heart of an inner-city pawnbroker`s business. A musician with a weekend booking had come to redeem his guitar. Another, for whom the gigs have been scarce lately, was offering his keyboard as a pledge.
”A woman asked if we could loan her a dollar on a baby`s ring,” Roger Lowis says. ”It only weighed out to 60 cents` worth of gold, but I gave her a dollar anyway. She said she needed it to buy baby food.”
Jack Cohen, proprietor of State Pawners and Jewelers, also reports that a pawnbroker often sees early warning signals before they`re reflected in U.S. Department of Commerce statistics. Sometime last year, Cohen recalls, his shop was the scene of a telling vignette about the peculiar nature of this recession. Pundits were just beginning to suggest that the managerial and entrepreneurial classes were being hit especially hard by the downturn.
Like Lowis` store, State Pawners, which is on State Street across from the Chicago Theatre, has a basic blue-collar clientele. Cohen`s customers are tradesmen, who might pledge a circular saw for a loan to get them through until their next payday. Others are factory workers whose bills have come due just as their overtime has been cut back.
One day, though, a well-dressed man entered the store. He looked around for a few minutes with a studied air of nonchalance, as if he might be diverting himself between business appointments in the Loop. He idly studied the glass cases displaying jewelry and watches offered for sale because their owners had failed to redeem them. Cohen thought he might be a collector mentally running through his want-list.
Then he furtively approached Cohen, pointed to a Cartier watch on his wrist and asked how much of a loan it would fetch. When Cohen said $300, the man politely declined and left.
Later, he came back to say he would be happy to take $300. Cohen suspects the man had shopped his offer at other downtown pawnshops. Many of a pawnbroker`s clients are repeat customers who know, virtually to the penny, what their merchandise is worth in pawn. But this fellow was obviously new to the game. He was, in fact, a real estate developer.
”He was a very intelligent-speaking gentleman,” Cohen says. ”When a guy like that hits rock bottom, you know the economy is in trouble.”
Misery brings customers
Cohen also knows that is true because of what might be called the Inverse Law of Prosperity that is recorded on a pawnshop cash register: A pawnbroker`s lot in life increases when that of other folk declines, since financial misery brings new customers into his store.
Cohen reports that the value of his outstanding loans is the highest it has been in the 40 years he has been in business. Generally, he makes loans totaling about $200,000 a month. But recently his clientele has been borrowing between $300,000 and $400,000 a month. Considering that the average loan he extends is about $50, he is witnessing a statistically significant sample of human suffering.
”You have to be heartless in this business,” Cohen said, after a long day of listening to clients. Hoping to squeeze just a few more bucks out of the pawnbroker, many had shared a personal tale of woe about the state of the economy.
Cohen says his typical customer is a product of the 1980s boom-time mentality. ”He is the kind of guy who makes about $200 a week and has gotten in the habit of spending $600 some weeks,” Cohen explains. ”In good times, he`d have a nest egg socked away that he could use to get out of debt. But by now, he has eaten that up and needs a loan from us.”
In return for bailing out hard-pressed customers, a pawnbroker in Illinois charges 3 percent interest a month, or 36 percent a year, according to a fee schedule set by state law. Some add storage fees and service charges too. Banks charge about 15 or 16 percent a year for unsecured personal loans
(the kind of banking transaction that most closely approximates a pawnbroker`s). So from a strictly accounting point of view, getting some quick cash in a pawnshop is not exactly a check-rated best buy.
Cohen, though, argues that numbers alone don`t tell the story. As he sees it, banks add on a psychological charge his customers aren`t willing to pay. Bankers ask lots of questions and make borrowers fill out forms. Pawning is an anonymous transaction. A customer offers something of value as a security deposit and, if the pawnbroker accepts it, gets cash on the spot. If the customer wants to share the story of what brought him to needing a loan, that`s fine. It he wants to take his money in silence, that`s OK too.
David Lowis adds that a pawnbroker preserves his customers`anonymity in another way as well. If you default on a loan on a car or house, your banker not only forecloses on the property, but also shares the story with a credit- reporting agency. That can make it tough, if not impossible, should you want to borrow again.
”A pawnbroker is like a priest or a doctor,” Lowis says. ”He doesn`t tell anything.”
He also extends a revolving line of credit to prompt payers and deadbeats alike, Lowis adds. The day after a customer defaults on a loan, he can come back for still more money, providing he has something else to leave as another pledge.
Spotting stolen goods
”For poor people, a pawnbroker is a court of last resort,” Lowis says.
He explains that a pawnbroker is not eager to acquire his client`s property through default. That leaves him with a piece of goods, often of marginal quality, for which he must await a bargain-hunting buyer before he can recover his loan money. And, contrary to popular mythology, a pawnbroker doesn`t deal in stolen goods, at least not if he wants to stay in business.
Lowis notes that each day, he and his fellow pawnbrokers must submit to the Chicago Police Department a list of every item they have taken as collateral. If any of that merchandise has been reported stolen, the police will return it to its rightful owner, leaving the pawnbroker holding the bag for the money he advanced on it.
Over the years, a successful pawnshop owner learns how to spot offers of suspicious goods, Lowis notes.
”If a ring is really yours, you have a certain unself-conscious way of taking it off and putting it on your finger,” Lowis says. ”If a customer starts fumbling for the on-off switch on a TV when we ask to see if it`s working, we can guess he hasn`t had it for very long.”
In fact, most of Lowis` clients liquidate their loans within three months, many within a month. In good times, his redemption rate (the fraction of customers who pay up and retrieve their goods) runs about 93 percent. That rate declines with the economy, and is currently about 85 percent. If it drops further, Lowis would see that as a most worrisome sign.
”The people we deal with can`t afford to lose their little things,” he says. ”They want to redeem them, so they will have something to leave with us again when they need a few dollars for carfare or to put food on their table.”
Indeed, Lowis is mildly optimistic. That his default rate has stopped rising leads him to think the economy might have already bottomed out and could start bouncing back by spring. Jack Cohen joins him in that guarded prediction.
Cohen reports that retail sales in his State Pawners were up significantly during the Christmas season. If that trend continues through the next few months, he would see an indication of renewed economic vigor analogous to a pattern he recalls from the end of the last recession, in the late 1980s.
Renewed consumer confidence, he explains, is often expressed in a pawnshop before being manifest at, say, the Marshall Field store that sits kitty-corner from his.
”Customers can buy jewelry here for half of what they pay in a department store,” Cohen says. ”At Christmas, we were seeing people who wanted to buy nice presents for their families, but were still cautious and willing to hunt for good buys for their money.”
A dreary forecast
Alas, it must be reported, such optimism isn`t universal among Chicago area pawnbrokers. (It wasn`t for nothing that Adam Smith`s contemporaries called his great invention, modern economics, the ”dismal science.”)
Steven Greenfield operates First State Pawners, which since 1884 has had a strictly carriage-trade clientele. Greenfield makes loans up to $200,000 on a single piece of fine jewelry. His tastefully decorated suite in the Pittsfield Building displays none of the battered musical instruments and obsolete camera equipment that are the standard decor of other pawnshops.
Greenfield`s clients, many of them residents of Lake Shore Drive and the North Shore suburbs, know he accepts only three kinds of pledges: jewelry, gold and coin collections.
But they might be shocked to learn that Greenfield sees an economic trend that echoes a dire prediction of Karl Marx, no friend to the upscale set. Almost a century and a half ago, Marx said it would be time to start writing capitalism`s obituary when the upper middle class splits in two, with half the bourgeoisie plummeting to the ranks of the great unwashed.
Judging by Greenfield`s current pattern of loans, that process may be under way.
”The kind of upper-bracket people who are supposed to be secure are now leveraged out, in just the same way their predecessors were in 1929,”
Greenfield says. ”My father has been in this business all his life, and he says he hasn`t seen anything like this since the `20s.”
Failure at the top
For instance, Greenfield had a customer come to him needing a loan of $10,000 so he could pay his child`s college tuition. A wealthy businessman, the fellow could have instant access to the loan officer at almost any bank on LaSalle Street. In fact, he has a multimillion-dollar bank loan that he previously took to finance his business enterprises, which haven`t been doing so well lately.
”He can`t go to his bankers for $10,000, because they might say: `If he doesn`t have that little money in ready cash, maybe we should take another look at his $20 million loan,` ” Greenfield explains.
Over the last few months, Greenfield has spotted a bit of a turnaround, but its peculiar form scares him: His more modest clients are redeeming their loans, but his really upscale clients are still hard-pressed.
How, Greenfield asks, can the nation have a real recovery if its captains of industry are still hanging on by their fingernails?
So, he concludes, unless the trickle-down theory is all wet, the rest of us are in for some more rough economic sledding.
