You might frown a little if you heard that the Inspector General of the U.S. Postal Service is worried about how much Americans are paying for check-cashing and payday-lending services. What dog does he have in this fight?
Well, catch up, because the Obama administration and the leftosphere have the ball rolling on this. They want Uncle Sam to take over the short-term financial services industry. (Emphasis probably not needed, but added anyway.)
As luck would have it, yesterday a new government report detailed an innovation that would preserve one of the largest job creators in the country, save billions of dollars specifically for the poor, and develop the very ladders of opportunity that Obama has championed as of late. What’s more, this could apparently be accomplished without Congressional action, but merely through existing executive prerogatives.
What’s the policy? Letting the U.S. Postal Service (USPS) offer basic banking services to customers, like savings accounts, debit cards and even simple loans. The idea has been kicked around policy circles for years, but now it has a crucial new adherent: the USPS Inspector General, who endorsed the initiative in a comprehensive white paper.
“As luck would have it.” Right. The Obama administration has been preparing the groundwork for this for some time now. How? By knee-capping the private short-term financial services industry. More on that below.
A maligned industry anyway; who cares?
Those who have been fortunate or disciplined or well-taught enough to do all their financial business, throughout their adult years, with solid, reputable banking institutions probably take a dim view of payday lenders. I know I do. I’ve never had occasion to borrow from one. Once, nearly 30 years ago, I had to cash a check on an emergency basis at a retail check-cashing place. This was back when one’s bank or credit union wasn’t networked with everyone else on the planet, and my credit union’s ATM system was down hard, on a Saturday afternoon. It was horrible: I had to write a check for $50 to walk out with $40. Never again, I swore.
But not all short-term financial services are about offering high-priced options to people with bad credit or sob stories. For a lot of people, there is little point in maintaining a bank account, on which they would have to pay maintenance and check-writing fees anyway, because they wouldn’t keep the minimum balances that eliminate those fees. There are multiple reasons why people sometimes make use of short-term financial services, whether they are cashing checks, loading up Visa check-cards, buying money orders, paying utility bills, or borrowing for short periods of time.
In her op-ed on this matter (see link above), Senator Elizabeth Warren (D-MA) of course describes such people as “underserved” by banks. That is a misleading characterization; most of the people who use short-term financial services could use banks, if it made sense to them to handle their money the way people who use banks do. Quite a few of them are young people, who in ten years will have bank accounts and credit histories.
But Warren’s narrative is how the case will be made that the U.S. federal government should become their banker.
The quiet attack by executive fiat: “Operation Choke Point”
The Obama administration hasn’t bothered to make a companion case that the private financial services industry has been performing badly, or that it needs reforming or reining in. Such a case could undoubtedly be made concerning at least some companies. New regulations could be proposed in Congress; the successful regulatory practices adopted by states could be studied.
But instead, starting about a year ago, the administration just began attacking the industry by cutting off its access to capital. The method has been to threaten FDIC-regulated institutions – big banks – warning them to cut off certain customers or face regulatory reprisals.
The customers? “Third-party payment processors” who handle the direct transactions with short-term financial services customers; i.e., owners of those store-front chains, or online lenders, that offer payday lending and other services.
The administration’s effort was dubbed Operation Choke Point, and unless you read the Breitbart article (link above) in early January, you’ve probably never heard of it.
Warren sounds in her op-ed for all the world as if she has just stumbled on the wonderful idea of making the Post Office a financial-services hub. But she’s connected directly to Operation Choke Point through the FDIC, where the department involved is headed by a long-time Warren associate, Mark Pearce:
At the FDIC, the official in charge of ‘Operation Choke Point’ is Mark Pearce, a highly partisan operative with ties to Senator Elizabeth Warren (D-MA), the intellectual force behind the Dodd-Frank legislation whose nomination to head up the new Consumer Financial Protection Bureau was withdrawn because Ms. Warren did not have enough political support in the Senate at the time to obtain confirmation.
Pearce was named director of the FDIC’s newly created Division of Depositor and Consumer Protection in 2010. According to the agency’s press release, “The FDIC Board of Directors approved the creation of the DCP last August to help carry out its responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.”
The Justice Department is in on Choke Point as well. Thirty-one members of Congress, alarmed to realize what was happening, wrote to Eric Holder and FDIC Chairman Martin Gruenberg in August 2013 demanding to be briefed on the operation, which, the congressmen pointed out, was being conducted “outside [the agencies’] congressional mandate.” The administration was not forthcoming (emphasis added):
In response to that letter, a Department of Justice official met with Congressional staff members at the Capitol in late September, but refused to answer any questions about the project. Sources with knowledge of the meeting tell Breitbart News that the official also told Congressional staffers that the Department of Justice was under no obligation to tell Congress anything about the program. The official also refused to state her name, which was discovered only after she left her business card on the table as she left the event.
Breitbart’s Michael Patrick Leahy quotes industry experts (emphasis added):
In an exclusive interview with Breitbart News on Monday, Richard Manning, Director of Communications for Americans for Limited Government, criticized the Obama administration’s efforts to destroy the payday loan industry. “Their intent,” Manning said, “is to create a government sanctioned means of driving private industry out of the business of providing payday loans. They’ve never shown a great willingness to be restrained by free market principles over the use of government sanctions.”
Peter Barden of the Online Lenders Association agrees that the Obama administration’s influence on bank regulators has overstepped its legal authority. ”It should also send a troubling message to banks that at any point regulators can force them to stop processing legal transactions simply because they don’t like a particular merchant or industry,” he said.
What’s clear is that this is a coordinated campaign to curtail short-term financial services – make them less available from private industry, thus putting hurt on younger, poorer people – and then arrange for Uncle Sam to step into the “breach” artificially created.
Weaponizing government
Thomas J. Basile, writing a must-read article for Forbes on 31 January, refers to this kind of coordinated campaign as the “weaponization of government.”
Basile makes the following point about the members of Congress watching Obama during the SOTU address:
Everyone in the House Chamber knew something that the American people have yet to fully grasp and Republicans have yet to demonstrate an ability to combat – that their government has grown so large, so complex, so involved in virtually every aspect of their lives, that it is now being used as a weapon by a small segment of the ruling political class.
He’s right. Congress hasn’t figured out what to do about these under-the-radar executive excesses. And to date, the Obama administration’s targets have been mainly the kinds of smaller, less-organized businesses that don’t make national news. The victims are principally poorer people: the wage workers who lose jobs in the industries that come under attack, or their customers. Who’s going to mount a big moral crusade to defend payday lenders, after all? And how many middle-class householders, with checking accounts and credit cards, would man the barricades to make sure such services remain available to day laborers, job-hoppers, etc?
Spreading the cancer of risk through the whole financial system
The Obama administration has counted on most of us not noticing its campaign to monopolize financial services for the poor. But we should be concerned: the Post Office plan will not only increase the federal government’s power over the finances of millions of Americans, but will increase everyone’s liability for bad credit risks.
Right now, there is a big buffer – interest rates, fees, intermediaries – between the universe of solvent account holders and borrowers, and the other people who, by contrast, handle their finances poorly (or at least, at a given moment, present a higher risk). When J.P. Morgan, one of the big financial houses targeted by Operation Choke Point, makes capital available to the payday and online lending industry, the capital comes from the bank accounts and debt balances of the responsible. But the risk is assumed by J.P. Morgan and the payday lenders and check-cashers. That risk is what the fees and higher interest rates are about.
Everyone can thus participate in the same financial system, but the responsible account holders are protected. Should Obama’s Post Office proposal be implemented directly, however, the U.S. taxpayer will be fully exposed to the higher-risk pool of financial customers. If the Obama administration encases the Post Office proposal somehow in an intermediate financial arrangement, it will be the banks involved, and their account- and share-holders, who assume the risk. Obama is likely to extort companies representing almost all of the financial assets in America into a scheme like this.
One way or another, it’s going to be you assuming the risk. Obama’s Post Office plan is a proposal to remove the firewall that keeps the interests on both sides of it in balance. Without the existence of the payday lending industry – the firewall – you wouldn’t voluntarily participate in a financial system that exposed you to the higher-risk customers. So Obama is going to force you to participate.
It’s clear from Mark Pearce’s connections, described in a brief passage in the Breitbart piece, that this is, in fact, the underlying idea (emphasis added):
As the FDIC press release announcing his appointment acknowledges, “[Mark] Pearce spent more than ten years with the Center for Responsible Lending in Durham, North Carolina, one of the nation’s leading sources of expertise in consumer protection in financial services.”
The Center for Responsible Lending’s operations have been very controversial. Financial journalist Lawrence Meyers, for instance, wrote in 2009 that “The Center for Responsible Lending (CRL) has a history of distorting the truth concerning payday loans (PDLs), used by 6 million Americans to meet short-term credit needs. However, the CRL is merely a front for the Self-Help Foundation, a credit union in direct competition with payday lenders, whose founders were principal purveyors of destructive subprime mortgages.”
The architect of Operation Choke Point has his background in the activist movement that forced unsound lending on the mortgage industry. This is the point at which to issue a reminder: it doesn’t matter what the purpose of this kind of campaign is. It may seem well-meaning, if muddle-headed, but that doesn’t matter. The result will inevitably be to corrupt the market integrity and safeguards of the industry involved. The sheer moral hazard created is big enough to drive a truck through.
Thomas Basile at Forbes focuses largely on Operation Choke Point, but he highlights the fact that Obama is “weaponizing” government against other economic targets as well (emphasis added):
Documents inadvertently leaked by the Department of the Treasury from a briefing on Operation Choke Point clearly show that the Administration is looking to significantly impact legal businesses because it believes the public needs to be protected from industries and customers deemed more likely to engage in criminal activity. According to the Administration, those industries interestingly include ammunition sales, gun sales, home-based charities, gambling, pharmaceutical sales, short-term loans, raffles, Amway and Mary Kay-style sales businesses, and credit repair services.
And so much of this, to the gratification of the Obama administration, can be “accomplished through existing executive prerogatives.”
The Republic’s emergency alarm has been sounding for some time now. We can’t afford to keep ignoring it.