Turn the Post Office Into a Bank? First Check Japan
(Bloomberg) -- The greatest public speaker I’ve ever seen was former Japanese Prime Minister Junichiro Koizumi. Standing on a footbridge in 2005, I watched him from above as he gave a speech to a crowd outside a train station as he thundered, cajoled and generally mesmerized the assembled throng. This was all the more impressive given that the topic of his speech was something exceedingly dry and boring. The snap election that was the occasion for Koizumi’s stump speech was focused on advancing a plan to turn Japan Post into several private companies owned by a private holding company.
Koizumi won his fight, his party crushing all opposition in a landslide, and his plan was set in motion, though the process has taken more than a decade. The company’s initial public offering in 2015 was the world’s biggest in that year. The government still owns most of Japan Post Holdings Co., and periodically sells off shares, with the goal of eventually reducing its stake to only a third from more than half now. But privatization hasn’t shrunk Japan’s postal bank itself, which remains one of the largest and most important in the world:
Why did Japan embark on this long and difficult road of privatization? And why did Koizumi win a landslide victory campaigning almost entirely on that promise? Japanese citizens didn’t seem particularly dissatisfied with the postal bank’s services — they were holding a quarter of their total wealth in the bank and its affiliated insurance company.
The problem was that Japan’s postal bank didn’t just take deposits — it also lent money, including to so-called zombie companies, or inefficient enterprises that survive due to below-market-rate loans. The presence of zombies creates unfair and destructive competition for efficient, profitable companies. When the lending is done by a government-owned bank, it can also be a vehicle for politicians to funnel money to their friends and supporters. The Japanese voters who propelled Koizumi to victory in 2005 were striking a blow against crony capitalism.
The lesson of Japan Post is important for the U.S., which is now considering turning its own postal service into a bank. New York U.S. Senator Kirsten Gillibrand recently introduced legislation that would turn the U.S. Postal Service into a bank. Progressive senators like Bernie Sanders and Elizabeth Warren have endorsed the idea, which is also gaining credence in left-leaning intellectual circles.
The basic rationale for postal banking is a good one — to provide cheap financial services to poor people. Right now, perhaps 7 percent of Americans — more than a quarter, by some other counts — don’t have bank accounts. Commercial banks have little incentive to serve low-profit poor customers, so it makes sense for the government to step in and give these people things like checking accounts and ATMs for free.
But postal banking wouldn’t just be about checking accounts, withdrawing cash and convenience. Gillibrand’s proposal would also allow the post office to make loans. The idea here is to out-compete businesses like the payday lending industry, which is often predatory, and tends to leave borrowers worse off than before. Gillibrand’s bill would allow the postal bank to make loans at the same rate of interest as Treasury bills. But making high-risk consumer loans at the same interest rate as the lowest-risk assets on the planet is a surefire way to lose money — if the postal bank was to really supplant the low-end consumer lending industry it would have to charge significantly higher interest rates to make up for anticipated default rates, which tend to be greatest among low-income borrowers.
The worrisome question is what the government does when people who take out loans from the postal bank and then don’t pay those loans back. The U.S. Postal Service is not a profitable entity, and losses on loans would send it — and by extension, the government — even further into the red. That would create a big incentive for the government to use its power to collect loans in ways that could end up hurting poor people.
The model here is student loans. Governments have resorted to draconian measures to claw their money back from borrowers — making student debt less easy to expunge in personal bankruptcy, or even revoking people’s professional licenses when they don’t pay up. Payday lenders are bad, but the government acting as a giant loan shark for poor people is an even scarier prospect.
There’s also a strong possibility that the government would be tempted to allow the bank to get into more lucrative businesses — mortgage lending, corporate lending and the like — in order to bolster USPS’s sagging bottom line. That could lead directly to the kind of inefficiencies and crony capitalism that Japan Post suffered from. Politically connected businesspeople could sustain uncompetitive businesses on lines of cheap postal credit, out-competing more efficient companies and slowing the growth of the U.S. economy.
So while postal banking makes sense as a way to give poor people access to basic financial services, the idea gives cause for concern. If short-term loans are made available to poor borrowers, there should be strong provisions to make sure that the government doesn’t act like a loan shark when it comes time to collect. And the bank should be kept out of business lending. There’s no need to repeat the mistakes of Japan Post.
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