It was probably inevitable that democratic socialists Rep. Alexandria Ocasio-Cortez (D-NY) and Sen. Bernie Sanders (I-VT) would team up to co-sponsor a piece of legislation—and that it would be a bad idea. Few might have guessed that idea would be to make the U.S. Postal Service a “public option” for banking.
.@RepAOC "We should have a not-for-profit public option for basic banking services, and we should be piloting these projects through the @USPS" #postalbanking pic.twitter.com/dobyU4hdT2
— Take On Wall St (@TakeOnWallSt) May 9, 2019
Congress already created a postal banking system in 1911, another time when socialism and populism were abroad in America. In total fairness, after the Panic of 1907, a system backed by the full faith and credit of the federal government probably looked like a less bad idea. And post offices were the outposts of the federal government before we had a truly national economy or an administrative state via the New Deal.
But then Congress created the Federal Reserve Bank and the Federal Deposit Insurance Corporation, which in theory removed much of the rationale for postal banking. In practice, after World War II, competition from private banks, government bonds, and nonprofit credit unions rendered postal banking moribund; the system was phased out starting in 1966.
Today, the U.S. Postal Service is in dire financial straits, losing $3.9 billion in fiscal year 2018. That loss was 44 percent larger than in 2017, despite making $1 billion more in revenue. Many Americans would rate the quality of postal service on a par with their state’s department of motor vehicles, perhaps lower.
Accordingly, when Ocasio-Cortez and Bernie call for a “public option” in banking, it is useful to consider what this term meant when the left was calling for a “public option” in the context of Obamacare. That proposal was a recipe for unfair competition to eventually drive private insurers out of business. Given the history of postal banking in America and the decline of the Postal Service since, creating a “public option” for banking would likely require giving the government unfair advantages.
Moreover, less than a decade after passing Obamacare, prominent Democrats—led largely by Ocasio-Cortez and Bernie—are already calling for a single-payer health-care system. When the socialists are pushing for a “public option” again, it looks like a prelude to nationalization of the financial sector.
However, these are not the only reasons Ocasio-Cortez and Sanders came up with this harebrained idea. Rather, postal banking would be a backstop to the potential effects of their proposal to cap credit card interest rates at 15 percent. The current median credit card interest rate in 17.73 percent; for those with low credit scores, the average is about 25 percent.
As Peter Suderman observes at Reason, one likely effect of the socialists’ proposal is credit card issuers cutting off poorer people with lower credit scores, although poorer people generally understand their finances and often rely on high-interest financing for emergencies. Suderman also notes that when options like payday lending go away, pawn shops proliferate. He could have added that withdrawing access to high-rate credit products can result in higher rates of bounced checks and personal bankruptcies.
Indeed, if credit card issuers decided to continue serving poor credit risks at artificially low rates to keep the socialists happy, one likely result would be more spending by credit risks, eventually resulting in increased bankruptcies. Credit card companies are already raising rates and lowering credit limits for riskier customers in anticipation of the next economic downturn.
In contrast, the socialists may not have considered that credit card debt has been securitized as mortgage-backed securities have been, and that a wave of credit card defaults would have a ripple effect throughout the banking system and the larger economy. These synthetic products are more regulated than they were before the financial panic of 2008, but no one should want to stress-test the limits of the current system.
Ocasio-Cortez and Bernie may feel free to be this ignorant and irresponsible, given that their bill would almost certainly die in the Republican-controlled Senate. The interesting question is whether it would pass in the House.
The Democratic caucus already has internal friction between the progressives and the moderates. The latter may not be keen to support a proposal dreamed up by America’s two most prominent socialists, particularly when one is running for president.
On the other hand, the House Financial Services Committee, chaired by Rep. Maxine Waters (D-CA), is considering a national 36 percent annual percentage rate cap aimed at payday loans. If advancing that bill means attacking an African-American entrepreneur for being racist, Democrats will do that too. Similar legislation is being considered in California.
Given the Democrats’ current leftward lurch, it is not surprising that they would attack the financial sector. It may even scare companies into filling Democratic campaign coffers, though this would be what the kids call “bad optics.”
These proposals, if they ever became law, would likely hurt the “ordinary people” Sanders says he is paternalistically hoping to “protect,” and possibly threaten the larger financial system. Then again, perhaps the philosophy here is that of Russian socialist-populist Nikolay Chernyshevsky: “the worse, the better.”