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A forgotten lesson of the New Deal era is that a public option for basic services can both ensure universal access and empower regulators to curtail abuses. In the case of consumer finance, a public bank would go a long way toward improving the economic security of all US households.
LOS ANGELES/SARASOTA – Because the consumer financial-services industry is structured to maximize profits and payouts to shareholders, it inevitably fails to meet the basic banking needs of ordinary American households. Too many people lack access to the financial infrastructure – check cashing, money transfers, bill payment, and consumer credit – that is necessary to participate fully in the twenty-first-century economy.
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This is not just a problem for those on the fringes of society. According to the Federal Deposit Insurance Corporation (FDIC), one in four households either does not have a bank account or must resort to high-cost or predatory services like payday loans. In either case, financial exclusion is preventing too many Americans from achieving basic economic security.
To address this widespread failing, we propose a government-provided public option in consumer financial services. A public option would set a true floor in the banking sector, by providing the financial infrastructure needed to ensure universal access to basic services. And, by adding an element of public-private competition, it could be structured to prevent financial fraud and other abuses that currently run rampant in the industry.
Financial exclusion mirrors a classic problem in the provision of basic infrastructure like electrification and broadband. When a public good is privatized, access to it often becomes privileged, rather than universal. That is why infrastructure is regulated with rules that ensure fair competition within and across markets. Policymakers have long known that they cannot expect market pricing, based on marginal cost, to provide universal access to all basic goods and services. In the case of banking, market incentives inevitably lead financial institutions to cater to higher-income groups, and to exclude lower-income groups whose business is not as profitable.
Historically, infrastructure regulators have addressed similar challenges through service requirements that mandate universal access. A classic example is the US Postal Service (USPS), which charges the same amount whether one sends a letter to a neighbor or to Nome, Alaska. When it comes to ensuring equity in banking, these precedents and existing institutions point the way forward.
History also shows us that financial exclusion is a persistent problem whenever universal service requirements are absent. During the New Deal era, regulators included the functional equivalent of such a requirement in charters for banks and thrifts. But these mandates were removed during the wave of deregulation in the 1980s, and banks quickly began to move away from low-cost financial services, and toward high-profit activities.
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This dynamic can be seen in the trend toward bank consolidation and branch closings, which has accelerated since the 2008 financial crisis and reduced access to services in low-income communities. According to the FDIC, there were roughly 5,000 branch closings in the United States between 2009 and 2014, with 93% occurring in postal zones (ZIP codes) characterized by below-median income levels. As a result, 7% of US households are unbanked, and another 19.9% are underbanked.
Underserved and left behind, individuals and families often turn to alternative, predatory financial services like check-cashers and payday lenders. These services charge exorbitant fees, and they are structured to trap borrowers in debt that cannot be repaid. In addition to reducing many households’ economic security, reliance on such services has broader implications for the economy. As the financial structure becomes more fragile, spending shocks are amplified, which raises the potential for macroeconomic instability, and even recession.
To address these problems, the federal government should create a public bank to offer basic financial services to households, including deposit and transaction services, small loans, automobile financing, and mortgages. To ensure banking access in every ZIP code, the new public bank could form a partnership with the USPS, which already maintains office branches across the country. And because 59% of post office branches are located in ZIP codes with one or no bank branches, this would go a long way toward addressing the impact of bank branch closures.
We also propose that the government manage an online financial-services marketplace, where private services would compete directly with public services. This, too, would give the government significant leverage to prevent financial exclusion and consumer-protection abuses. Indeed, operating an online marketplace would give the government more regulatory leverage, because it could set high consumer-protection standards as an entry condition.
More broadly, a public option would enable regulators to manage the distribution of risk in financial markets. Private financial services that heap too much risk on households would be rendered uncompetitive by the more affordable, stable public services.
We have emphasized the regulatory power of a public option because that is the feature that seems to have been most obviously forgotten since the Great Depression. The public options offered through New Deal programs created widely accessible, stable mortgage finance in the postwar period. Only after these programs were dismantled did the twin problems of financial exclusion and predatory lending reemerge, with serious consequences for the public. It is crucial that we revive the power of public action, and deploy it to foster financial inclusion and economic security for all.
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