Archive for April, 2023

American Banks Fail to Serve Half of the People

Saturday, April 22nd, 2023

How the Other Half Banks; Exclusion, Exploitation, and the Threat to Democracy, Mehra Baradaran, 2015

In the process of deregulation, several bedrock principles of banking policy were sidelined. First, that banks had unique public responsibilities was rejected. Banks were relieved not only of public serving functions, but even laws protecting consumers from harmful bank products were weakened by the regulators tasked with their enforcement…For example, the two regulators of the national banks, the Office of the Comptroller of the Currency (OTC) and the (OTS). announced that national banks did not have to follow state consumer protection laws–or state laws designed to protect their citizens from predatory financial practices…Here the state laws were “preempted” by exactly zero consumer protection federal laws. most laws affecting banks had a requirement written into them that bank supervisors deciding on bank related issues should only allow an action if it benefits the public. However the question of whether a certain bank action would benefit the public morphed into an inquiry about bank profitability.

Between 1980 and 2000, the assets held by commercial banks , securities firms and the secularization they created grow from 55 percent of GDP to 95 percent.—today, a handful of behemoth banks control most of the country’s assets.

The deregulatory ideology of the new financial oligarchy infiltrated the “Wall Street Washington Corridor” by means of campaign money and ideological capture. An ideological capture of key policy makers– Larry Summers, Robert Rubin, Alan Greenspan, Timothy Geithner, Henry Paulson, and others–who had spent their careers marinating in the industry, working in “captured” regulatory agencies, or captured by extreme laissez-faire ideology, also took place during this era. Demands are rising across the political spectrum, including from Joseph Stiglitz, Simon Johnson, Paul Krugman, Richard Fisher, and even the king of deregulation, Alan Greenspan, for breaking up the banks.

It was inevitable that in an era of deregulated banks, large failures would occur. What was surprising was that the market rules would only be applied when banks were making profits and not when they ultimately failed. Instead of allowing the market to enforce its discipline and allow banks to fail, as the repudiation of the social contract dictated, the government stepped in and bailed out the banking industry…In other words, instead of using the crisis to effect real reform in making like Roosevelt did, these policymakers focused myopically on maintaining bank profitability without requiring anything in return—“the government bent over backward to make the deal attractive for the banks, charging below market interest and eschewing any significant ownership–so shareholders, not taxpayers, would benefit when the banks recovered.

The average American has $15,000 in credit card debit, $33,000 in student loan debt, and $156,000 in mortgage debt. Not only do the majority of the American public borrow their way up the income ladder, but federal mortgage and student loan markets and loose credit policies led to the creation the American middle class…However,in a society built on credit as a means to wealth, a large portion of people at the bottom are currently left out…We cannot tolerate such heavy state involvement in providing credit to the banks while leaving the less well-to-do at the mercy of the modern day sharks These are real people who live and work in cities and towns, poor neighborhoods and wealthy ones, both public servants and blue-color workers. They pay for things that are widely considered essential. They borrow with forethought and with care. They are mainstream ordinary people forced to borrow on the fringe. And fringe lenders (payday loans, title loans, money transfers) are the only ones meeting this large market demand because banks, credit unions, and other mainstream lenders have chosen not to.

Fringe banking has grown exponentially since the 1980’s and hasn’t stopped…”Virtually nonexistent in this country 20 years ago, [this sector] has grown into a $100 billion business. Since the mid 1990’s, the number of payday lenders nationwide has grown over 10 percent annually.” With over twenty thousand stores, the payday lending industry makes $40 billion in loans annually. There are more payday lender storefronts than Starbucks and McDonald’s combined…Banks do give credit in the form of credit cards and overdrafts, but relying on these products as loans can get expensive and banks hide many of their fees and interest rates in small print and do not make them clear up front. Research has shown that payday borrowers who have “credit card liquidity” or the ability to borrow on a credit cared, still opt for payday loans…This is another critical and somewhat ironic, aspect of the alternative financial service industry’s success: its ability to take advantage of the federally sponsored banking system, using its access to clearinghouses and even its banking charters to lend.

But many people are failing. They are failing even as the banks are succeeding, and they are failing because the banks are no longer involved in providing them credit. The government has outsourced the provision of credit to the banking system, and it provides this system with state support and cheap credit–cheap credit that is not flowing out to reach those that need it most. In fact, while the government has provided interest rates to banks at 0 percent, it has allowed interest rates to the poor to skyrocket to triple digits. If the intended result is to help the public with credit, why continue to use the banks as a medium when they are clearly leaving out a significant portion of the population? Why not provide credit directly to those who need it in order to be certain they get it?

A social contract has existed between banks and the government since the early days of the Republic. The government support the banks through trust-inducing insurance, bailouts, liquidity protection, and a framework that allow the allocation of credit to the entire economy. Banks, in turn, operate as the central machinery of the economy by providing transaction services, a medium for trade, and individual and business loans that spur economic growth. This entanglement between the state and the banking system must surely mean that banks should not exclude a significant portion of the public from the bounty of government support. This is not just a banking market problem but a threat to our society’s democratic principles. When the state becomes involved in the banking system, that system cannot create or contribute to such a vast inequality. The supply of credit has always been a public policy issue, with banks functioning as intermediaries. Insofar as the state enables credit markets, all creditworthy Americans deserve equal access to credit, especially because reasonable and safe credit can provide a smoother path both through and out of poverty. If banks are not providing credit to the poor, the state should provide it directly.

The existing post office framework represents the most promising path toward effecting such a public option. American banks long ago deserted their most impoverished communities, but post offices, even two centuries later, have remained–still rooted in an egalitarian mission. There have never been barriers to entry at post offices, and their services have been available to all, regardless of income. And so, it is not unreasonable to suggest that as America’s oldest instrument of democracy in action, the post office can once again level the playing field, and in the process, save itself from imminent demise…The social contract has been breached. Banks enjoy government support but do not serve the entire public. Direct government involvement remedies the breach and bridges the gap in services.

A deep-seated problem exists within our stratified banking system: the state is shoring up a powerful banking industry that is, in turn, excluding those Americans most in need. This is corrupting our democracy, and we ignore it at our own peril.