How the Other Half Banks
>>FRANKLIN D. ROOSEVELT: We have had a bad banking situation.>>MEHRSA BARADARAN: Banking has always been, and will always be entangled with the government. The state has certain either credit policies or monetary policies that they enact through banks. What the banks need from the government is that trust, right? Banks need the citizenry to entrust them with our deposits, our hard-earned savings. And so, that’s what the government gives to banks, they guarantee our deposits.>>FRANKLIN D. ROOSEVELT: We do not want–and will not have–another epidemic of bank failures.>>MEHRSA BARADARAN: So insofar as you have this federally supported banking sector, there’s always been a recognition in banking policy that there has to be a place for banks that have a soul, right, that bank to people of lower means, the low income. And so, throughout history, especially in the 1900s, you have this movement for the credit union, the savings and loan, Morris banks, things like that. And they’re incredibly successful. But then, sort of, something happens to these banks as banking transforms in the 1970s, where banking becomes much more competitive, and it becomes much more difficult for small banks that are regionally focused, or that deal primarily with small sums or just residential loans to survive against the big money market banks. And so, it’s either, you compete with banks for maximum profits, or you keep your mission of serving the low income. It ends up that you can’t do both. And so, they sort of en masse leave urban areas, very poor rural areas, and they go into higher income areas.
And as they do, the fringe lenders come in to fill the void. Payday lenders, check cashers, title lenders, can gain a huge profit from banking to the poor, because the business model is such that you have to keep renewing the loan, and it keeps accumulating interest and fees before you end up paying it off. So, baked into the payday lending business model is this idea that you’re going to be indebted for a very long time. It’s a trap that a lot of low income people get into. But it’s a completely rational choice that the poor make. Before people go to payday loans, it’s clear that they’ve tried every other alternative. They’ve tried, you know, bank loans, they’ve tried credit card loans, they usually have tried family. So this really is an act of desperation. Which is the reason why payday loans charge the absolute maximum allowable by state, right? So a lot of times payday lenders say things like, “Well this is the market price.” There is no market for a desperate loan. And so the federal government is providing this very low cost credit, it’s supposed to sort of go through the banks and get to the public, and insofar as it’s not getting through the banks to certain portions of the public, let’s just send it there directly. The best way, I think, to do this is through the existing post office structure. Not only because the post office exists in every zip code, but because the post office doesn’t have an incentive to take advantage of the poor. You have an institution that is essentially responsible to the public. It’s an easy solution to a massive problem. You already have public funds going into the banking sector, let’s just let public funds go directly to the poor,
and cut out the middle man.>>FRANKLIN D. ROOSEVELT: And so it became the government’s job to straighten out this situation.