The unbanked are unbanked because they have nothing to bank. In a nation driven by capital formation and returns on capital, focusing on the unbanked seems like putting the horse before the carrot. The American Treasury Department and the central bank should be focusing public policy on encouraging capital formation and generating high yield. Nothing in the U.S. Constitution says that consumers should be encouraged to borrow or that banks should be obliged to lend to the consumer class.
Political responses such as the Community Reinvestment Act, the Dodd-Frank Act, or the creation of the Consumer Financial Protection Board cater to voters but overlook the need for encouraging the accumulation of capital goods necessary for driving the American economy.
More importantly, political responses mentioned above serve to incentivize consumers to enslave themselves to credit even while the last four decades have seen real wages go stagnant. The political class on the left is quick to leave out consumers’ complicity in the financial downturn of 2007-2009 where consumers were encouraged to borrow against their shrinking means to repay. Consumers do not need protection from banks. We need our mindsets redirected in our approach to banking.
Each household needs to rebuild their capital buffer. It is easier said than done especially in a transition period where the timeline for capital’s replacement of labor with automation and artificial intelligence is being sped up. Not only is more work being done from home but businesses are determining whether the benefits of keeping employees at home outweigh the costs of bringing them back in-house. A number of employers have been transparent with updating employees on their engagement with companies offering AI-driven resources that increase efficiency. Larger companies are partnering with technology companies whose mission is to reduce the time employees spend on certain tasks. These are threats to labor and income and in this environment not only is the consumer tasked with increasing household capital formation but with seeking additional or alternative opportunities that provide for increases in income, savings, and investment.
One way, in my opinion, to increase capital while deriving additional income is for public policy to encourage high yield on capital. The consumer who flips her mindset from shopper to investor needs an environment where her savings can accumulate at a faster rate; where higher residuals can be reinvested into her principal holdings and create appreciation. Public policy should support full employment of capital and maximum prices for capital. How does the US get there?
One way to get there is for banks to abandon their risk-based interest rate pricing model, where higher interest rates is the price that riskier customers must pay for borrowed funds. Rather, banks should abandon consumer lending altogether. Lending money to a consumer in a stagnant income, labor replaced by automation environment so that the consumer can build a deck, finish a basement, or send a kid to school is what I call low value enterprise lending where the loan is being applied to a consumer’s wage income versus residuals the asset provides.
Instead, interest rates should reflect the competition between borrowers seeking to demonstrate their enterprise ideas will provide the greatest returns to capital and equity. High interest rates should not be charged because of a high risk of failure. Rather, high rates should be charged because where the lender sees high returns to equity in the enterprise, the lender seeks to capture some of that value.
Banks, then, should abandon consumer lending and put energy and resources into commercial or merchant banking. Consumer involvement in banking should be limited to establishing savings or investment accounts with banks or owning stocks in banks.
Again, the upside from this model for banks, a focus on lending to merchants that leverage real assets to make income. The upside for the consumer is less borrowing and more investing thus greater capital formation. Also, the consumer may learn how to plan purchases over a long term versus seeking the psychic value of getting something now and paying for it later. For example, a consumer may put away cash over some determined period of time to purchase that new deck without having to burden themselves with debt.
Or, a consumer may seek out a group of private consumer lenders who are not connected to the banking system thus reducing the chances of shock to the system should a borrower renege on a loan. They will be forced to rely on the courts, lawyers, and mediators for resolving any conflicts with private lenders.