DANA CHASIN | Postal Banking's Promise (and Pitfalls)

Postal Savings Certificate from FDR Days (1941). Last month, Sen. Kirsten Gillibrand introduced S. 2755, the Postal Banking Act.   The bill would establish retail banking services at every U.S. post office and authorize the U.S. Postal Service (USPS) to offer checking and savings accounts, small-dollar loans, debit cards, cash withdrawals and money transfer services in each of its roughly 30,000 offices. – Dana Chasin's Update 275, Guest-Posted by Permission. In 1910, President William Howard Taft introduced a postal-savings system for new immigrants and the poor that lasted until 1967. The need for postal banking has been revived by several recent events. The USPS Inspector General (IG) published a report in 2014 in response to the USPS  $2.7 billion deficit, describing how the USPS could implement postal banking policies to address the agency's funding crisis. Postal banking could generate $9 billion profit.  Sen. Elizabeth Warren has been a long time advocate of postal banking since this IG  report and lauded many of the benefits of postal banking. Sen. Bernie Sanders brought postal banking back to the forefront with Sen. Warren during the 2016 primary campaign. The endorsements by these progressive stars in the Senate led to strong popular support of the idea, but neither Senator introduced legislation. S. 2755 is the first legislative step  since 2014. Benefit 1. Serving lower income and rural communities Because of a lack of access to high-quality financial institutions, many Americans take out high interest, high-cost alternative forms of credit, costing them nearly $100 billion a year. The average underserved household pays creditors 10 percent ($2,412) of their gross income in fees and interest. Postal banking would allow more than 80 million lower-income Americans without bank accounts to access essential financial tools and be safeguarded from predatory lenders. The USPS’s 30,000 office locations would house the retail arm of the bank because they are located in every community. These locations exist in banking deserts. 38 percent are in zip codes with zero banks and 21 percent are in zip codes with only one bank branch. Providing access will help Americans generate savings, wealth and credit, while bringing millions of households into the banking system. http://www.apwu.org/issues/postal-banking Benefit 2. Eliminating the USPS funding crisis President Trump recently gave a speech blaming Amazon for the USPS funding crisis. Nevertheless, Congress is the entity most responsible for the funding crisis facing the USPS. This funding crisis has plagued the USPS since the Bush administration passed the Postal Accountability and Enhancement Act of 2006 (PAEA). The USPS has reported losses every year since 2007, losing $2.7 billion in 2017 alone. This can be attributed to the provision in PAEA that requires the Postal Service to prefund its retirees' health benefits up to 2056. Costing $5 billion per year, this is a requirement that no other entity, private or public, has to make. According to the 2014 IG’s report, postal banking would generate $9 billion in profit annually, effectively eliminating the funding crisis the USPS faces. Benefit 3. Reducing the Need for Payday Lending The main focus of S. 2755 is to fight payday lending. S. 2755 would implement smaller short term loans as a public option. 12 million people spend a total of $7 billion a year on short term, smaller loans known as payday loans. These loans average $375 initially with an additional $520 (138%) in fees and interest. Payday lenders have been known to charge interest rates in excess of 300 percent. The USPS has estimated that they could provide the same loan for less than 30 percent in interest rates. S. 2755 would set the interest rates around 10 percent. Payday lending may be a trickier legislative fix than the first two benefits provided by the bill. There would be underwriting issues that would have to be solved and the interest rate would have to be debated. Implementing small dollar loans into postal banking, however, would decrease predatory payday lending and increase the number of low income Americans who have access to loans they can pay back, improving credit scores. Benefit 4. Expanding Access to Financial Institutions  S. 2755 would assist millions outside of the banking system who are vulnerable to predatory lenders and other risks, especially those living in rural areas. Many of these people have been denied access to financial institutions simply because of their location. Although access to financial institutions has not been regarded as a fundamental right in the past, this bill attempts to frame it that way and poses the question: Why haven’t we regarded it that way before? And why isn’t access to financial institutions a fundamental right? Why the Idea Hasn’t Been Taken up It should come as no surprise there are opponents to incorporating financial services into USPS operations. The Citizens Against Government Waste has been vocal, publishing a letter arguing the Postal Service should not be trusted to manage money, pointing to it surpassing its statutory debt limit and $120 billion unfunded liability. Anti-government conservatives in the Republican Party are unlikely to warm up to an idea like S. 2755 anytime soon. The bill is something to watch if the Democrats continue to regain power as the midterm elections proceed..

PIGOU TAX | Good Tax on Sugary Soda (Updated May 29, 2016)

Illustration of "Taxing Sugar to Fund a City",
Op-Ed, NY Times, May 25, 2016

An Op-Ed by Mark Bittman, who co-founded The Purple Carrot and is a Fellow with the Union of Concerned Scientists, argues that the Berkeley, Calif. popular vote (3 to 1) to tax sugary soda drinks is the wave of the future.

Four other cities in Northern California are also considering such a tax, including the biggest, San Francisco.

So is Philadelphia.

Bernie Sanders opposes such taxes on grocery items because he says they are regressive, i.e., their burden falls on the poor more than the rich.

That is so, not only because poor people spend more of their income on groceries, but also because they are less educated and don't realize how bad for their health is a large intake of sugary drinks.

All the more reason why this tax is especially important for poor people.

Mayor Jim Kenney faces Bernie Sanders' concern about the regressive nature of soda taxes. He is pledging the revenue from the new tax to fund community amenities, especially those for children–universal pre-kindergarten (Head Start for All), community schools, libraries and parks.

So it is win-win for the poor. Either they continue buying the unhealthy soft drinks and support their community projects, or they give up buying the sugared drinks (Pepsi and Coke are offering many  alternatives) and they reduce the demand for health care services.

Comment

So far I have mostly just summarized Bittman's essay. Let me say that I think Bittman is right on this issue. While Bernie Sanders is on target with many of his financial proposals, he is I think wrong on the question of taxing sugary soda.

The illustration to Bittman's essay, of a soda can siphoning into a piggy bank is apt on its own, and is doubly apt when we consider that it is a PIGou Tax.

A tax on things raises their price and reduces their consumption. If the items are potentially socially deleterious, like gambling, tobacco and alcohol, then reducing their usage is a good thing. A Pigou Tax, named after British academic Arthur Cecil Pigou, is one that falls on socially undesirable goods. FDR quickly understood that it was better to permit alcohol and get revenue from it through a "sin tax" than to continue to try to prohibit it.

MONEY | Why Bank Shares Swooned

This time, the presidential candidate embraces
 the label "democratic socialist".

Feb. 3, 2016–Pam and Russ Martens write a savvy blog, "Wall Street on Parade". They have been connecting dots the average person would not be able to.

In their recent post on bank stocks, they note the rapid decline in megabank stocks, with special attention to Goldman Sachs.

The decline in stock prices could be related to the drop in commodity prices, toxic loans and other economic developments.

But it may also be related to the better-than-expected performance of Sen. Bernie Sanders, who has made the case that the financial crisis of 2008 was caused by deregulation of the banking system. He wants to bring back the regulatory provisions of the 1933 Glass-Steagall Act (the deposit insurance part is still in place and the coverage has been super-extended).

Sanders is correct that FDR's feat in 1933 was extraordinary. I have been writing about how FDR's first Treasury Secretary, Will Woodin, calmed the bank panic that faced the incoming administration in early March 1933. Woodin was a Republican and was Chairman or President of two of the 20 companies in the Dow Jones Industrial Average in 1928–American Car & Foundry and American Locomotive. Woodin had a business background. He got behind financial reform and the system that he and FDR put in place in 1933 served the country well for more than half a century. It's a fair argument that we could bring back the basic concept of walling off the insured deposits and making sure that they can't be accessed, especially in an emergency, by risk-seeking investment banks.

FIX THE MIX | Missing Glass-Steagall!

Sen. Carter Glass (D-Va.) (L) and Rep.
Henry Steagall (D-Ala.).

The Democratic candidates in the last debate seemed to agree that the American banking system needs fixing.

• Sen. Bernie Sanders argued that the erosion of the Glass-Steagall wall between commercial banks and financial speculators was the setting for the 2008 financial meltdown. I think he is right on the mark, although NPR Fact Check (Jim Zarroli) questioned Sanders and Washington Post Fact Checker Glenn Kessler gave Sanders three pinocchios for saying on January 5 that "Glass-Steagall banned commercial banks from making loans to investment banking firms to facilitate their trading in the shadow-banking arena." This suggests that we need to get more of a consensus on what Glass-Steagall actually did.
• Former Secretary of State Hillary Clinton has presented a series of proposals to fix Wall Street, although she got two pinocchios for saying "[E]verybody who’s looked at my proposals says my proposals are tougher, more effective, more comprehensive" than Democratic presidential candidate Sen. Bernie Sanders’s. Fact Checker Michelle Ye Hee Lee says: "[T]he Sanders campaign has now compiled a list of 60 experts and counting, backing his plan over Clinton’s.” 

As voters, we need to understand what the argument is about. The stock market's collapse since the beginning of 2016 may be in part a sign that the slow implementation of Dodd-Frank reforms is opening up re-emergence of fear about our financial system.

We have not done since 2008 the thorough-going financial market fixup that FDR and his GOP Treasury Secretary William H. Woodin and the Chairman of the Senate Appropriations Committee, Senator Carter Glass (D-Va.) undertook in 1933.

Glass-Steagall's Goal: Fix the Mix!

An easy way to remember what Glass-Steagall did is that it was designed to Fix the Mix, i.e., to end the mixing of speculative and deposit-taking activities.

One place to begin is to remember what FDR and Secretary Woodin faced when they opened for business in Washington on Saturday, March 4, 1933.

Most banks had been closed the day before, by order of state governments. Some were bankrupt. The public was panicked about the financial markets. They were afraid that they would never see their bank deposits again. Some of them unfortunately turned out to be right about that.

Then FDR declared a "bank holiday". He closed all the banks for the coming week, and then later extended the holiday for some of the banks. Treasury Secretary Woodin personally supervised round-the-clock printing of greenbacks, complete with cinematic coverage, while teams of his Treasury bank examiners looked at every bank and decided which ones would be pronounced solvent and opened up and which ones would be closed and liquidated, with depositors forever losing full access to their funds.

Meanwhile, House Banking Chairman Rep. Henry Steagall, Democrat of Alabama, carried water for the banks. The banks desperately wanted deposit insurance to prevent future panics and reassure the public and allow the banks to get back to the business of making money. Steagall proposed deposit insurance, and eventually the law created the FDIC and got insurance, initially only up to $2,500 per depositor.

Roosevelt and his Treasury Secretary were at first totally opposed to this deposit insurance. They wanted regulation of the kind that Sen. Glass proposed, a strict prohibition against banks putting at the disposal of investment banks any of their depositors'  funds. Sen. Glass correctly worried that deposit insurance might open up complacency about how banks were investing their money. They all understood that government-enabled insurance of bank deposits would leave the banks free to speculate with depositors' funds because depositors would no longer be afraid of their bank going broke.

Roosevelt, Woodin and Glass were induced to support limited Federal assumption of banking risks in return for Steagall's agreeing to support legislation that Sen. Glass had introduced, creating a wall between banks and speculative financial institutions. Sen. Glass was seeking to protect the Federal Reserve System he had helped create in 1913, when he had Steagall's job. They were all interested in restoring faith in financial markets. At this time, Adolf Hitler was gaining ground in Germany because of the crash of 1929 and the inability of the financial markets to get back on their feet.

The Glass-Steagall Act (the Banking Act) of 1933 had two main parts. One was deposit insurance. This was gradually extended from $2,500 per depositor to $250,000 per account. The other half of the Glass-Steagall bill was regulation of securities firms and separation of investment banks from commercial banks. This that was gutted between 1950 and 2002, especially in 1999. 

Glass-Steagall was about protecting the henhouse assets of FDIC-insured banks from foxes selling speculative securities and generally engaging in risky forward transactions (futures and options). Glass-Steagall was about putting a wall between the humdrum business of taking deposits from consumers and making secured loans back to them, and the risky business of speculating in business equity and debt.

Glass-Steagall split apart two groups of financial institutions–commercial banks and investment banks. Investment banks underwrite and place securities (debt and equity) and they engage in transactions of two kinds:

• A passive role, helping someone that wants to reduce their risk. 
• An active role, entering the market with the intent of gambling. In this role, they are creating risks, and the more they disguise a deal to minimize the significance of risks in a transaction, the more dangerous their activity to systemic stability.

Glass-Steagall was designed to reduce market risks in two ways.

• It provided federal deposit insurance, which reduced the risks for both the banks and their depositors. The banks really wanted this, because when FDR took office the entire banking system was shut down by risks that went sour.
• It provided for bank regulation to limit the risk to the Federal Government.

The law was strict. No existing mixing of investment banking and deposit-taking banks was permitted by Glass-Steagall. There was no "grandfathering".

Bank Lobbyists' Goal: Add to the FDIC and Mix the Fix!

What has happened since Glass-Steagall?

For the first 50 years, the banks have sought to beef up the Steagall side, to greatly expand Federal deposit insurance. The deposit insurance half of Glass-Steagall has not been eroded; on the contrary:

• Federal Deposit Insurance Corporation (FDIC) coverage has been beefed up more than 100-fold. The limit has steadily increased from the original $2,500 per depositor to $250,000 per deposit account.
• Depositors are now allowed to have more than one covered account (sole, joint, custodian etc.), multiplying the coverage further. 
• Beyond that, the FDIC for efficiency reasons in practice avoids the costly litigation involved in liquidating a bank and instead tries to negotiate takeover over its assets and liabilities by a solvent bank, which in effect means 100 percent coverage of deposits.

Starting under President Reagan, Congress has been mixing the fix, dismantling protections put in place by FDR, Woodin and Glass in 1933, in the name of "modernization". These moves, culminating in the 1999 Gramm-Leach-Bliley Act, lowered the walls between the banks and non-bank institutions, without a corresponding increase in regulation of non-bank financial institutions. When Gramm-Leach-Bliley was passed, the Economist magazine in 1999 expressed concern that deregulating the banks without a broadening of oversight of non-bank institutions of the kind that Britain had undertaken in 1997 was inviting trouble. The Economist was right.

Requiems for Glass-Steagall

1. Warren Gunnels, Sanders’s chief policy aide, is quoted by Glenn Kessler of the Washington Post:  "[C]ommercial banks played a crucial role as buyers and sellers of ... credit-default swaps, and other derivatives. This would not have happened without the watering down of Glass-Steagall in the 1980s and the eventual repeal of Glass-Steagall in 1999."

2. Brookings Fellow Phillip Wallach  agrees that Citicorp could never have become such a megabank without Gramm-Leach-Bliley: "That is the best arrow in the Glass-Steagall revivalists’ quiver. Citibank deposits were attached to Citibank bad investments, and Citi was the Too-Big-To-Fail-iest of them all."

3.  James G. Rickards, former general counsel of the Long-Term Capital Management hedge fund which was brought down by a "black swan," agrees with Sanders that the 1999 law was a bad one and that there was an important cultural shift after Glass-Steagall was repealed. Previously, he said, such shadow-bank loans required permission from the Federal Reserve under rule 4(c)(8). "The presumption was it was illegal unless the Fed said you can do it. After Glass-Steagall, we didn’t have to ask permission, and it enabled the banks to do what they wanted."

4. Camden R. Fine, chief executive of the Independent Community Bankers of America, favors a restoration of Glass-Steagall. He notes that Lehman owned a federally insured industrial loan company (ILC) that held insured deposits: "[T]he repeal of Glass-Steagall gave both commercial banks and investment banks who owned ILCs much greater flexibility to deploy their capital and their deposit funds to whatever purposes they wished, and those firms leveraged themselves many, many multiples of times more than they would have been allowed before."

5. Former Federal Reserve chairman Paul Volcker supports the idea that eliminating the Glass-Steagall separation of commercial and investment banking allowed for a trading mentality to take hold at some banks.

6. Harvard B School Prof. David A. Moss in 2009: "[T]he success of New Deal financial regulation [may have] contributed to its own undoing. After nearly 50 years of relative financial calm, academics and policymakers alike may have begun to take that stability for granted. Given this mindset, financial regulation looked like an unnecessary burden."

7. Former Federal Reserve Chairman Alan Greenspan said in October 2008: "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief."

8. John Reed, former Chairman of Citigroup, wrote recently in The Financial Times that the Glass-Steagall wall between banks and investment banks was needed: "As is now clear, traditional banking attracts one kind of talent, […] in many important respects, risk averse. Investment bankers and their traders are […] comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organizations tend to organize and focus on products rather than customers. This creates fundamental differences in values."

BUBBLES | Which Candidate Best Understands Them?

Bernie Sanders wants to bring back Glass-Steagall; Hillary Clinton does not.

Pam and Russ Martens argue that Sen. Bernie Sanders showed in the debate on Tuesday the best appreciation of the causes of the 2008 financial meltdown, the risks remaining today. and what to do to regulate the financial markets.

The Martenses say that Hillary Clinton does not understand that Dodd-Frank gives power to the regulatory agencies to break up large banks.

They are impressed that Sanders opposed the 1999 teardown of the Glass portion of the 1933 Glass-Steagall Act, back when it happened. (The wall between commercial and investment banks was torn down, but the insurance of commercial-bank deposits proposed by Rep. Henry Steagall is still in place.)

Sanders wants to bring back the wall created by Senator Carter Glass (D-Va.). Hillary Clinton does not.

Although Sanders calls himself a Democratic Socialist and calls for revolution, what he is saying fits what the London Economist Magazine said in 1999. I pointed out the Economist position in Huffington Post in 2008.

Creating U.S. Jobs - Six Avenues

What are the real choices before Washington this fall?

The number one issue before the nation is economic recovery. Unemployment rates have been too high for too long. Here are a few ideas about what we can expect and hope for during the next few months:

1. Don't Depend on an Out-of-Ammo Fed. Federal Reserve Chairman Bernanke wants to appear to be doing everything he can. However, there is little more the Fed/FOMC can do to help the economy since December 16, 2008 when the Federal Funds rate was lowered to the Zero Bound. Quantitative Easing hasn't made much difference. How much can the Fed spend buying long-term Treasury bonds to lower long-term interest rates, even if it sells short-term Treasurys at the same time? How much difference does it make for the Fed to buy up long-term bonds if the Treasury is selling new ones at the next window?

2.  Implement Dodd-Frank to Help Address the Liquidity Trap. The economy would turn around if the Fed's easy-money policies led to more bank lending. But bankers are still worried about their balance sheets. Lax oversight by bank regulators has been replaced by close questioning. Bad loans are still not all recognized and new categories of potentially bad loans have opened up, e.g., the sovereign debt of the PIIGS countries, whose debts are freezing bank liquidity despite  of banks EU rescue programs. Speeding up implementation of Dodd-Frank financial reforms would improve confidence in and among U.S. banks.

3. Pass the President's Second Jobs Program. Another $450 billion for job creation may not be sufficient. However, it is necessary and a CNN poll and others show, by wide margin, that the U.S. public wants this program implemented.

4. Encourage Entrepreneurship. Creating jobs is not just about getting existing firms to hire more workers. It's about encouraging people to start up new businesses. Incubators help. Entrepreneurship can be taught - it's like a language. Governments at all levels can do big and small things to make it easier for people to create businesses.

5. Modify Fuel Prices to Encourage Green Jobs. Federal subsidies of alternative energy and energy efficiency didn't work as well as hoped because prices for fossil fuels don't reflect their full costs (and also because many states and localities did not have staff ready in 2009 to respond to stimulus programs offering money for green jobs). Subsidies for fossil fuels need to be ended and a tax on gasoline or carbon should be imposed. Tom Friedman had a good op-ed on this topic today ("Is It Weird Enough Yet?"). The last Congress rejected cap-and-trade and a carbon tax, but the pressure to find money to pay for Medicare and Social Security, as well as more evidence on global warming, might bring these proposals back to debate and action.

6. Most of All, Reform the Tax Code to Encourage Job Creation. If U.S. payroll tax rates are lowered significantly, as President Obama has suggested, this will have a dual benefit, encouraging employers to hire and putting money in the hands of middle-class consumers, who will spend it. This could be paid for by raising the top tax for those earning, say, $500,000 or more, and gradually raising the cap on the payroll tax (as Sen. Bernie Sanders, I-VT, has proposed). This would return the income tax to a semblance of progressivity and would tax those best able to bear the burden and least likely to spend new money.

George Magnus in the Financial Times describes the world's predicament as a "once-in-a-generation crisis of capitalism", bequeathed by the excesses of the 1980s-2008 period. The stakes couldn't be higher.