Can the Credit System Be Reformed?

Via Ezra Klein, Steve Randy Waldman suggests that the government should offer every American a credit card with a limit of $1000 to be repaid in full each month as a public service, which Klein dubs "sort of brilliant." The goal of the card is to provide everyone access to cheap transactional credit, which is the ability to pay for goods you can afford right away but don't have the cash on hand to pay for, as opposed to revolving credit, which allows you to pay for things you can't afford right now and spread the payments out over time. In order to preserve the card's function as a public service and prevent it from becoming a burden to those unable to repay it, there would be no late payment fees, and if a borrower was in default for five years, his or her balance would be erased. Fees would be minimal, at most 1% and possibly 0% for some borrowers, just enough to cover the program's costs.

What makes this a public service is the fact that it would rescue borrowers, especially financially troubled ones, from exorbitant credit card interest rates and fees. I'm all for that. But of course, this idea has no chance of ever becoming law. Zero. Zilch. Squat. Why? Because the credit card companies would never stand for it. I suspect that Waldman and Klein know this and that this is why Waldman calls his proposal "speculative" and Klein qualifies it as only "sort of" brilliant. This points to one of the basic dysfunctions of capitalism, which one sees constantly in every area of the economy, government policy and politics, namely corporations' use of their massive economic and political clout to enrich themselves at the public's expense.

But even if the credit industry wasn't standing in the way, Waldman's idea has another fundamental problem: it ignores the fact that in today's economy, poor borrowers--exactly the people who must need protection from predatory lenders--don't just need transactional credit, they also need revolving credit because they can't afford the basic necessities of life on their regular income. This in turn is a result of the fact that for the last thirty years, virtually all of the growth in the economy has been absorbed by the ruling class, as shown in this chart from the CBO.


Waldman specifically states that in exchange for nearly free access to transactional credit, access to revolving credit would be made much more difficult to obtain. This would spell doom for the ranks of the working poor, who depend on revolving credit to pay for many of life's basic necessities. While the working poor pay dearly for their access to revolving credit, without it they would be even worse off.

So a further step is necessary to rescue the poor from their victimizers in the credit industry. Either the government would also need to offer low-cost revolving credit, which would essentially destroy the credit industry, or the widespread poverty in the US would need to be eliminated so that people would no longer need revolving credit to finance their continued survival. Neither solution would be possible under the current balance of forces between the ruling class and the working class; some massive shift in social power would be necessary to make this happen. In other words, we'd need a revolution, or at the very least a mass social movement.