Saturday, February 15, 2014

Post Offices As Banks

Senator Elizabeth Warren* has proposed empowering post offices to do consumer banking and lending (as is done, I believe, in several other industrialized countries.)

How would that help people?  Let's look at how consumers are treated by today's established banks.

Here's some history.  Up until the 70s, at the larger commercial banks, consumer banking was considered a necessary nuisance, a backwater in the banking world.  Consumer bankers were generally not held in high regard because the profits from consumer banking were low.

Then came the soaring interest rates of the 70s which resulted, in large part, from the OPEC oil price increases.

Interest rates soared on loans to all banking customers, corporate as well as consumer.  Rates soared so high that the states had to repeal the previous "usury rate" limitations which had kept interest rates low.

As oil prices came down and as our economy adjusted to the new realities, wholesale and corporate interest rates dropped to levels near those from before the interest rate run-up.

But banks found that the consumer market didn't pressure them to lower consumer interest rates nearly as much as the corporate markets did - consumer interest rates stayed relatively high - well above the rates which had just a few years earlier been considered criminal usury.  (I did legal work for a large US bank, so far as I am aware, there was no collusion among the banks on these rates.)

Because of the increases spreads between the rates banks borrowed at and the rate they charged consumers, profits from consumer lending soared and consumer bankers became the heros of the commercial banking world.

Incidentally, those rapacious rates were the reason banks were able to survive the huge losses they incurred from the LDC debt crisis - the loans to the lesser developed countries which had to be largely written off.  For example, the large bank I represented in the restructurings sold off $7 billion in LDC loans for about $2 billion - a loss of roughly one  sixth of its total assets.

That $5 billion dollar loss (for a bank of about $30 billion in assets) did not sink the bank only because of the massive profits they had begum making on consumer loans.

Are you upset that we the people had to bail out the banks in 2008?  Bet you didn't know that we the consumers unknowingly bailed them out in the 1980s.

Banks still make huge profits on consumer banking.  Credit unions offer one alternative, consider the value for consumers if our postal service could be expanded to provide another low cost alternative to the current banking system.

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I very much support Senator Warren (as well as Bernie Sanders, Sherrod Brown and Al Franken.)

I disagree, however, with the impression Senator Warren is creating about the so-called "$83 Billion Bank Subsidies."  Those "subsidies" are the lower costs of borrowing banks have because of the core central bank function of "lender of last resort" of the Federal Reserve - which not only provides stability to the banking system, but which keeps interest rates lower for all elements of the economy.

See my last post at

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