Ouch ... I spent my first year freelancing using a Zoom H4N, 302, 416, and 2x g3's. It was all i could afford at the time, and I was able to mix 3 features, a bunch of shorts, docs, and other random gigs on it. I suffered though, and the inability for time code, or the ability to name files didn't always make editors happy. I still worked hard, and I don't think I undercut anyone. I just generally said yes if someone was willing to actually pay me, even if it was low. I couldn't offer a smart slate even if i wanted to rent one, and ultimately felt stuck working on all low-rate stuff.
Not sure which city you're talking about, but in NYC at least even with my simple set up I was anywhere from 100$-200$ gear+service.
For the OP: I've found a cool way to "hardball" producers/clients is when asked if you're available, you tell them you're on a job already making X, and can't cancel on them because they've been giving you more work. People perceive value, and by nature we want what we can't have. The next time he calls, he'll WANT you, not the other way around. Just a thought, might help. Again, the big issue here is how dependent on this guys work you are. I've found that you really can't know what the right call is 100% of the time, and just go with your gut. Sometimes you win and dodge a bullet, sometimes you say "Yes" to an In-Kind job, only to get offered a high-paying gig the same day after you've already said yes. That happened to me this weekend, but of course I'd never bail on a friend. Could have used the coin, though..