After excessive leverage, the largest problem with Wall Street and the financial sector as it exists today is that we rely on it as an essential feature of many policies that (in theory, at least) provide support for individuals and households that need it.
A new Niskanen Center paper by Monica Prasad explains how our roundabout, credit-based system of increasing consumption for the needy came into being and why it should change to a more straightforward system of redistribution:
The more a government spends on social insurance, the less likely households are to fall into debt. Social insurance includes pensions, health care, family allowances and parental leave, job training, income support, unemployment spending, and other such policies. Spending on these policies enables households to build up assets and reduce debt…
Because this model of political economy emerged over time through many steps that were not part of a grand plan, we have never had a national debate on whether our economy should be organized around credit to the extent that it is. There has been plenty of discussion over the years about whether government spending is good or bad, and whether the growth of finance has been good or bad, but virtually no discussion of how the two are interrelated. In particular, there has been almost no recognition of the fact that the price of lower government spending is increased indebtedness for households and bigger profits for bankers.
Prasad’s argument is that the path-dependence associated with the choices made in how financial support for households is provided, beginning with the New Deal, has only expanded the size and power of the financial sector. We could either provide resources through direct tax-and-transfer schemes (the European model), or through regulatory subsidies and mandates to lenders.
This amounts to a perverse privatization scheme–say what you will about the efficiency of government agencies, but cutting a check is pretty hard to mess up and won’t enrich people who have no business making money off of this policy goal in the first place.
And, while traditional right-wing critics of subsidized lending to those who otherwise wouldn’t be able to get a loan overstate the problem, there’s more than a kernel of truth to their arguments. On the one hand, certain groups of people will always be shut out of credit markets (such as renters in the case of mortgage lending). To correct for this requires making it easier for these struggling people to take on more debt, which can put them in a precarious financial position.
And, as we learned in 2008, large cash transfers are inevitable in a bloated and overleveraged financial system designed to provide credit to those who otherwise wouldn’t get it.
Our current system is a case study in kludgeocracy and “the submerged state.” There is simply too much popular demand for this support to do away with it wholesale, but we can at least not do it the dumb way. This means (1) making the support more streamlined rather than relying on complex financial markets and (2) providing direct cash assistance to reduce the reliance on debt and the risks inherent to increasing borrowing among the least well off.