The Case For A Public Option For Small-Scale Savings

Kevin Drum’s stewing about banks and hidden fees seems to me to suggest a case for “postal banking,” in other words a public option for small dollar deposits:

I have a visceral aversion to doing business like this, but I also understand why they do it: any bank that charged simple, flat, annual fees would lose all of its good customers, who would migrate to banks that make most of their money from penalty fees that they’ll never have to pay. Bad customers, conversely, would eventually migrate to the bank with flat fees as they came to realize that it was a better deal with them. So the nice bank would have lots of bad customers and the evil bank would have all the good customers.

If every bank charged simple, open fees, there would be an equilibrium of sorts. But how do you get there? And should we even try? I’d like to, but I can’t pretend it’s very likely to happen, or even that it’s in the top 20 problems facing the poor. So here we stay.

I’m not holding my breath on this, but in principle the solution is to run small-scale banking as a public service. Every Social Security card would come with a bank account attached. The account would pay an interest rate pegged to always be lower than the 30-year treasury rate. You’d get an ATM card and some checks. The accounts would have some fairly low maximum quantity of money that could be deposited ($20,000?) and a very simple, flat, transparent fee structure. The challenge to private sector banks would be to either deliver a level of features and customer service that tempt people out of the public bank, or else to just focus on raising funds from rich people by offering a good interest rate.

You could leave things there, but the government bank accounts could also be a useful lever for other policy initiatives down the road. Each American could be offered a $500 high school graduation present, and the Federal Reserve could be authorized to use the government banking system to deliver “helicopter drops” of money as a macroeconomic stabilization tool.