If the U.S. Government Treated Poor People as Well as It Treats Banks

[applegrove]

If the U.S. Government Treated Poor People as Well as It Treats Banks

by Mehrsa Baradaran at the Atlantic

http://www.theatlantic.com/business/archive/2015/10/if-the-us-government-treated-poor-people-as-well-as-it-treats-banks/410614/

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Consider another story. Steven Thomas earned great money before the financial crisis, but he had made some investments that all started to go bad during the crisis. From one day to the next, Thomas couldn’t pay his daily expenses. Despite his best efforts, he was headed for financial ruin. He was confident he could get back on his feet if someone would just help him survive this short-term financial emergency. Luckily, he found a miracle lender who would make generous loans and charge him an exceptionally low rate—the lender happened to feel that it was in its best interest for Thomas to avoid bankruptcy, so it was willing to ignore the obvious credit risk he posed.

This is a true story, but Steven Thomas is not a real person. He represents the largest American banks, and that miracle lender is the federal government. Why is it that Thelma Fleming and Steven Thomas are treated so differently?

This inequality is not inevitable and cannot be chalked up to the basic economic laws of supply and demand, which require a higher cost of credit for the average person than the average bank. Both Fleming and the banks should have failed, according to market rules, but the government intervened on the banks’ behalf. In the United States, the banking market does not operate according to standard market rules.


The truth, though, is that the source of Fleming’s loans is the same as the banks’—only the banks got it for practically nothing, and Fleming got it bundled with life-crushing interest. Payday lenders, which consist of a handful of large corporations, get their loans from the largest commercial banks at low interest. These banks, of course, get most of their credit through customer deposits and the federal government. Even their use of consumers’ deposits, for which they pay virtually nothing, is made possible by an insurance scheme backed by the full faith and credit of the federal government. Banks also receive direct Federal Reserve money at a cool 1 percent interest, not to mention “discount window” loans, which help banks survive a credit crunch.



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