Campaign Issue: How the Other Half Banks

Presidential contender Sen. Bernie Sanders appeared on Jimmy Kimmel's program recently, saying: "Jimmy, we have millions and millions of low income people who have to go to these pay day lenders and pay outrageous interest rates. They're getting ripped off right and left. We can have our Postal Service provide modest banking to low income people where they can cash their checks and they can do banking. I think it will help the Post Office, and it will help millions of low income people." [Video]

MEHRSA BARADARAN, mehrsa at gmail.com, @MehrsaBaradaran
Baradaran is associate professor at the University of George School of Law where she teaches contracts and banking law. She's author of the forthcoming book How the Other Half Banks from Harvard University Press.

Baradaran recently wrote the piece "If the U.S. Government Treated Poor People as Well as It Treats Banks" for the Atlantic, which states: "One of the great ironies in modern America is that the less money you have, the more you pay to use it. The country's 'unbanked' must pay high fees to fringe banks to turn their paychecks into cash, pay their monthly bills, or send money to a spouse or a child. The unbanked pay much of their income--up to 10 percent--just to use their money. For these families, the total price of simple financial services each month is more than they spend on food. Indeed, it is very expensive to be poor.

She said today: "Pay day loans are full of myths. Some people contend that people who use them are just being financially stupid, that education will remedy this problem. Pew recently recommended that people turn to their family and friends for loans. John Oliver had a good segment [video], but similarly told people to 'do anything else.' But all this assumes that low income people actually have other real choices.

"If you have an emergency need for $500 -- like you need to fix your car so you can keep getting to work -- you're going to get it even if your only option is to get into a bad financial agreement.

"Another myth is that this is all driven by the 'free market' -- but credit allocation is a public policy decision. The big banks have access to massive amounts of free credit from the Federal Reserve -- a gigantic subsidy. But even the word 'subsidy' doesn't fully capture the situation. Calling federal support of banks a subsidy is like calling the wheels of your car a 'bonus feature.' The banking system and specifically, the credit markets, rest atop a federal government foundation of support and funds. They're supposed to share the resource that provides with the rest of the country, but they don't.

"Sen. Sanders has caused a ruckus talking about 'socialism,' -- but what we have is socialism for the big banks, we just only call it socialism when it's directed down -- not up.

"In terms of the postal banking solution, some claim because postal banking is successful in other countries that it's not something that will work in the U.S., but is was actually quite significant in the U.S. -- and adopted by conservatives like William Taft -- from 1910 through World War II and until 1966.

"FDR chose FDIC insurance as a mechanism to stabilize the banking system, so we saw the rise of community banking, especially after World War II -- but now community banks have deserted low-income areas, so postal banking is really needed again."