MyRAs: Bad For Consumers, Bad for Government
The financial crisis spawned a whole new set of regulatory requirements and oversight bodies for banks. Newly-empowered regulators are supposed to stop banks from doing stupid things that harm individual consumers and the financial system.
Now there are suggestions that we go one step further-cut out the middle-man and have the government offer financial products and services. But further ensnaring the government in the financial markets is not the answer to the real needs of consumers.
In the State of the Union, President Obama introduced MyRA, a new type of starter retirement account for Americans of modest means. MyRA, the specifics of which are still in the works, would enable employees of companies that do not offer retirement accounts to save up to $15,000 in small increments. The government would guarantee that MyRA investors would not lose their principal.
MyRA money would be invested in Treasury securities, which means the program gives the government a new set of purchasers for its debt. It is less clear why investors need MyRAs. Individual retirement accounts already offer Americans a way to save for retirement and offer greater flexibility since they can be invested in securities other than Treasuries. Moreover, the government guarantee counteracts the message of personal responsibility for retirement that seems to be driving the MyRA proposal.
If the Office of the Inspector General of the Postal Service has its way, government's involvement in the provision of financial services will not end with the MyRA. In a report released last month, the IG gushed that "[a] suite of financial services from the Postal Service could be a powerful new tool to help the underserved become more financially secure," and "financial services may be the ‘killer app' for diversifying [the Postal Service's] revenue base."
The IG report summarizes the post office's unimpressive history of offering financial services. Its money order business is dwindling in the face of competition. People used to be able to make savings deposits at the post office, but the Postal Service ended that service in 1967 due to its waning popularity.
The inspector general nevertheless suggests plunging back into financial services. The report envisions a "Postal Card," which would be a multi-purpose reloadable prepaid card that could link to a saving account. The Postal Service could offer this and other services, such as electronic bill pay and e-commerce payments, in partnership with private banks.
The IG is optimistic that the Postal Service has an edge on the private market when it comes to providing financial services to the underbanked. The report explains that "the Postal Service has a tremendous opportunity to offer small loans that could save borrowers a lot of money - billions of dollars when aggregated across all potential users - which they could spend on more productive things like rent, groceries, utilities, and mortgage and student loan payments." A footnote acknowledges that providing financial services to the underbanked carries "inherent challenges," but the report glosses over the implications of those challenges on the interest rates and fees the Postal System would have to charge.
If the Postal Service embarks on this financial services mission, it may find itself faced with the choice of losing money or charging the same "exorbitant fees and interest" it faults the private sector for charging. Private companies are willing to serve the underbanked as long as regulators permit them to objectively assess and charge for the associated risks and to cover their administrative costs, which are disproportionately high on small loans. Too often, well-intentioned regulators impose fee caps or other regulatory burdens that have the effect of narrowing consumers' options when they could benefit most from vigorous competition for their business.
In the IG's model, the Postal Service's risk would be mitigated by its authority to dock delinquent borrowers' tax refunds-a power not available to private lenders. In addition, overhead costs might be lower than for private companies given that the financial services would be offered at existing post offices. The Postal Service would do well to look beyond the report's rhetoric to the experiences of non-profit micro-lenders, which find that charging high interest rates is necessary to sustain their mission of helping the underbanked.
Markets are expert at matching the needs of consumers with products and services to fit those needs, if regulators allow them to do so and do not displace them with government-subsidized alternatives. A competitive market keeps prices and bad customer service in check. Government, which is not subject to the same competitive pressure, lacks the incentive to cater effectively and efficiently to the needs of consumers and investors. Relegating low-income consumers to government financial service providers is not the way to replenish government coffers.