In Defense of the Post Office: The Case for Nationalization

The stock market closed around 8,000 points today, matching its 1998 and 2003 levels. The roller coaster rides between 1998—2003 and 2003—2008 have been fun and profitable for some, but for many a legitimate question is whether they would rather have not gone on the ride at all?

In class last week, it was suggested that nationalizing the banking system would make it “like the post office.” This was intended as an insult, I suppose, but in the current environment I’m not sure many people who have lost their retirement savings or their homes would think of it that way. Recall the post office’s unofficial motto: “Neither snow nor rain nor heat nor gloom of night will keep your mail carrier from making the daily rounds.” I don’t think it’s a stretch to suggest that many people would like to attach a similar sentiment to their banking system—lumbering and “inefficient” perhaps, but stable and dependable nonetheless. (Eliot Spitzer today makes some applicable points in arguing for killing the idea to privatize social security on Slate today.)

Let’s look at the postal service for a minute. Last week it made big news by suggesting that postal service would be cut to five days a week. But drilling down into the recent history of the post office suggests that this proposed move might simply be a prudent one. It may come as a surprise to some, but the Post Office has been self-sufficient since 1982, and while it has certainly run its share of deficits ($2.8 billion this year), it has not come to the taxpayers begging for billions of dollars in relief. Last year, the post office handled 203 billion pieces of mail without taxpayer assistance. Moreover, the price of a stamp adjusted for inflation has remained relatively stable since 1971.

Obviously, we do not want the entire financial sector to operate like the postal service. Without risk there is no growth, and while I suggested earlier that stability is desirable, stability and stagnation are not the same things. But, perhaps we do want a large sector of the economy to operate like the post office—after all, the post office does coexist with DHL, FedEx and UPS—the postal market provides both a stable, low-cost option for the vast majority of the public and a more expensive, but more dynamic option for those who have the need for it and the ability to pay.

When we channel the entire financial sector into an environment that takes risks that the overwhelming majority of the public have no interest in, and stand nothing to gain by, we end up with a small segment of the population coming up with new and increasingly dangerous ways to play with the money they have. As Michael Lewis describes it, “the difference between fantasy finance and fantasy football [is that] [w]hen a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original.”

“They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running.”

Ferguson explains that, while the entire economic output of the world is about $50 trillion, the “notional value” of derivatives contracts topped $400 trillion before the fall. According to Ferguson, what led to the fall was “massive speculation on the future prices of American houses” on top of which was “erect[ed] a vast inverted pyramid of incomprehensible securities and derivatives.”

It seems clear now that this was indeed what caused this problem, but the more important question is why does this keep happening? Marty Basu points out the repetitious pattern of boom-and-bust cycles, and concludes that the system of rating the mortgage-backed securities was defective. Basu concludes that: “It may be the case that after this latest collapse, the U.S. economy might realize that it is not worth the inevitable collapse to play this game again.” In a similar vein, Brian Darsow notes that “To believe that the financial markets were going to collapse in the way they did, one would have to believe that financial professionals, especially those at ratings agencies, were either 1) unusually interested short-term gain at the expense of most long-term gain; or 2) ignorant and incompetent.” Several other of my classmates suggest that in order to ensure that a situation like this does not happen again, we need to take measures to more effectively allocate the risks of such activity.

What I would suggest is that as long as vast sums of money are allowed to accumulate in a sector tasked with generating constantly increasing returns and, not only that, but competing for the highest returns we will have these boom-and-bust cycles. Those caught in the middle of them, like the CDO salesman Lewis talks to, will of course be “unusually interested in short-term gain” because everyone else is. What would the point be of them not engaging in these increasingly risky ventures? (Andrew Fincham offers a good description of this: “our competitor A is doing X to increase investor returns; if we don’t do X we’ll lose business to them; if X turns out to be a bad idea, well, we’ll be no worse than they are.”) A number of those in the financial industry have said flat out if they did not participate in this race they would have been excorciated by their shareholders and likely fired. If you do not have a job, your long-term returns are of little consequence.

So, back to the post office. The civil servants tasked with running that organization are concerned with routine, predictability and stability. Sure, they’re trying to make enough money to cover their losses, but for those who just want to pony up 41 cents to get a letter from point A to B, they don’t want the post office to do much more. The vast majority of Americans want to be able to deposit their savings and have it be secured, they want to be able to get a loan to buy a home if they have a steady job, and they want businesses with actual business models rooted in reality to get the funding they need. They do not want a stock market that will rise exponentially if it is simply destined to fall again—the people who want that are those in the financial industry and their hangers-on. Those who sold the bad mortgages and the CDOs have made their money in the short-term, and likely (especially the mortgage salesman) never had any expectation of anything more. If you think that civil servants will never have any motivation to adequately run a banking business, it’s worth noting that the CEO pay cap Obama is proposing at $500,000 isn’t far removed from Geithner’s salary as head of the NY Fed.)

Let’s look at another lumbering government agency—the Federal Housing Administration, which provides mortgage insurance. Remarkably, the FHA is also a self-funded agency, and it is telling that the market share of FHA loans dropped precipitously during the subprime boom, from 12% of all homes in 2002 to under 4% in 2006. The FHA simply required more of the mortgages it would back than the subprime lenders did. What does this suggest? Perhaps that a cumbersome, public agency run by civil servants does a significantly better job valuing risk and putting people in homes than does the private sector left to its own devices. The government, after all, is ultimately accountable to the people, while the CDO or mortgage salesman is just one part of a system that when in a frenzy has been shown to be accountable only to others interested in short-term gain. Further, when the government is dictating all the conditions of the financial sector under TARP (from capitalization rates to CEO pay), doesn’t it make sense to lower the transaction costs and simply have the government manage these assets itself. Especially when the banks often don’t act in the way the government intends (i.e. hoarding TARP money instead of lending). As Paul Krugman argues, since banks are “already wards of the state” shouldn’t the government and taxpayers insuring the downside capture all of the upside.

Certainly there must be a space for risk and growth in the financial sector—but the leverage and concentration of those risks must be limited. More importantly, however, for most Americans what is important is stability, mild risk and reasonable growth, and the FHA and the Post Office suggest that a nationalized banking system can meet those needs.


Leave a Reply