The pandemic disrupted Americans’ household finances in unpredictable ways. I often interview consumers from all over the country about their finances. Consider Cecily from Illinois who found her work hours cut back and a ballooning grocery bill with children at home all day without access to school lunches. Even though she was accustomed to shuffling money to keep the bills paid, several fell past due.
Cecily’s is only one story among millions in which fragile household finances snapped during the pandemic. These stories are known but perhaps their ramifications are not understood until it’s too late. As we saw in 2008, our economy is incredibly fragile. Its health amounts to the cumulative capacity that we provide for people to bet on their own futures. The credit market is the entryway to that future.
The impact of the pandemic’s economic shutdown induced even small-government advocates to acknowledge the need for government to step in and save households and industries from ruin. Stimulus money, along with other programs, has almost certainly prevented enormous tragedy and a third round is sure to go a long way to shoring up American household finances.
We can’t lean on the government forever, though. The engine of the economy will have to rev up if we expect household incomes to rise.
Government action alone could never facilitate the economic activity needed to generate prosperity for 320 million people.
Yet, even the most ardent free capitalist can see from the recent failures of the Texas power grid that the market optimizes for short-term gain and rarely prioritizes planning against long-tail outlier events. The market can be trusted to find profits and opportunity, but its unbridled enthusiasm will also produce housing crises, grid failures, contaminated water, labor exploitation, stock market bubbles, lead paint in toys, ponzi schemes, and many other societal ills. No individual can plan against those forces without some government protection and support.
The question isn’t whether we should lean on the government or trust the free market.
We must acknowledge that all-or-nothing ideological fights to the death between the Right and the Left make us weaker. Neither the free market nor government action are unqualified evils, neither are they unqualified virtues. Indeed we must begin to see past the rhetoric and realize what role each must play for building a healthy economy and protecting consumers.
The financial services industry stands as a perfect example of the need to find balance and it couldn’t be more essential to helping households out of this recession. For too long America has swung from pole to pole on this issue. Abuses by banks and lenders drove overly aggressive government regulation, which would suppress or even eliminate markets by destroying the supply for products.
After the 2008 recession, banks almost thoroughly abandoned the short-term lending market. Tony, in California, had been a good bank customer for twenty years, but it rejected him for the loan he needed to make it through the housing collapse. The final blow to his finances came when his wife was diagnosed with cancer. She survived, but their finances never recovered from the cascading effect of missed bills precipitated by his lack of credit when they needed it most.
Short term lending for people with good credit scores got outsourced to credit cards. People with damaged credit were pushed to unregulated lending products, payday loans, and non-bank lenders where consumer protections are dependent on the philosophy of the individual companies. Some were good, but all too many proved to be abusive.
That leaves millions of previously trustworthy consumers scrambling to find the funding they need when faced with an unexpected expense, like a car repair or health care bill.
The coming tsunami of missed payments, dropping credit scores, and increased financial fragility is inevitable in this environment of tight credit. If we are not careful, we will see needlessly compounding tragedies as we did in 2008, and many responsible actors, both borrowers and lenders, will be excluded from the lending economy. When we slam doors, we can’t always control who gets left out in the cold. Government stimulus checks have filled some of the gap, but the money will run out long before the need is satisfied.
It has been said that credit is the lifeblood of an economy. Most Americans want badly to pay their own bills, and households must have access to credit if we expect them to move for their next job, avoid defaulting on an unexpectedly high utility bill, or replace a rundown car. All people should have the opportunity to invest and it starts with investing in themselves.
Janey in California took one of the most difficult leaps into her future when she moved herself and her daughters away from her abusive husband. To get their apartment, she had to borrow from a non-bank lender. The loan Janey took didn’t exist at the time of the last economic crisis. Market innovation had given her an option she didn’t have before. Unfortunately, some states haves eliminated the kinds of loans that Janey relied on in the pendulum swing back toward aggressive regulation.
The Biden administration has a unique opportunity to learn from past excesses. In this moment of crisis, the Government needs to be the referee of our economy and ensure that the game is played fairly without destroying markets. Industry needs to accept regulation and pursue the opportunities only it can find. If we fail to seize this opportunity for a balanced approach, more catastrophes will come and real people will suffer. We must find a middle ground where market innovation is encouraged and government regulation ensures consumer protection. If we fail, we fail Cecily, Tony, and Janey’s family – we fail average Americans doing their best to care for themselves and their own.