Hey, You Guys at the Fed, Fix the Plumbing!

How are Americans recovering financially from the coronavirus shock? Slowly. Very slowly. The widely heralded $1,200 checks for each and every low- and moderate-income American adult are only now beginning to arrive, weeks after Congress gave this aid the green light. And millions of eligible Americans may not see any help for months.

Why all the delay? One prime reason: The U.S. financial industry has a plumbing system designed to make rich people richer.

We’re not talking sinks and water fountains here. We’re talking about the financial plumbing that moves money from one account to another. In other nations, money moves at digital speeds. You deposit a check, then you can quickly access your new money.

In the United States, you can’t. You have to wait anywhere from one to five days, depending on the day of the week you make your deposit.

Now back in the “old days,” waiting periods for checks “to clear” made sense. Banks presented with a check for deposit had to make sure the money really existed. The verification took time.

In today’s digital age, verification can be nearly instantaneous, and nations as diverse as Japan and Mexico now have “real-time” payment systems that eliminate the traditional wait. The United States, under the Federal Reserve’s current timeline, won’t have a similar system in place until 2023.

And that long delay suits America’s banks just fine.

“Banks have developed a lucrative business in allowing customers — particularly those waiting for a check to clear — to withdraw more money than is legally available and then charging a hefty fee for the overdraft,” as a New York Times analysis noted earlier this week.

Introducing a real-time payment system to fix all this, says Brookings analyst Aaron Klein, would be “the single most important policy lever” the Federal Reserve could pull “to reduce income inequality in America.”

Our current financial plumbing, Klein explains, sends bank customers living paycheck to paycheck through an “expensive maze of fees.” If they stay in the banking system, they risk overdrafts that typically run over $35 a pop. They can actually save some money by going outside the banking system and getting a $500 check cashed for $25 or even going to payday lending outlet for a short-term loan.

That may be why, notes Klein, we have “more payday lending stores than McDonalds in America.”

Shutting down this maze of overdrafts, check-cashers, and payday lenders with real-time financial plumbing, adds Klein, would likely save low-income families at least $10 billion a year.

In the corona crisis short-term, the New York Times points out, the Federal Reserve could and should simply require banks “to make payments from the government available immediately” to customers. Federal checks, after all, aren’t going to be bouncing.

The Trump administration, meanwhile, has been showing absolutely no interest whatsoever in minimizing big-bank profiteering off the coronavirus relief effort.

Under the relief legislation passed in late March, for instance, the administration has the authority to prevent banks from deducting unpaid fees off the $1,200 federal checks their customers receive. But the administration has no intention of exercising this authority. Last week, the American Prospect revealed that a top U.S. Treasury official had given bankers a green light to deduct away.

Our financial plumbing, in other words, remains a mess, and we’re going to need more than wrenches to fix it. For starters, some progressive lawmakers on Capitol Hill are pushing the Federal Reserve to establish accounts with the Fed for every American. Any future direct federal payouts to individuals could go straight into these accounts, a move that would cut private banks entirely out of the money flow.

The New York-based Great Democracy Initiative unveiled a gameplan for creating these individual Federal Reserve accounts — FedAccounts for short — two years ago. Banks, the Initiative points out, all already have direct accounts with the Federal Reserve. These accounts give banks instant payment clearance and also earn higher than normal banking interest.

Fed accounts would give individual Americans the same advantages. How would Americans connect with the Fed on these accounts? Post offices could become the interface.

“Fed ATMs” at post office locations and trained postal clerks, the Great Democracy Initiative notes, “could handle cash deposits and withdrawals as well as check deposits for FedAccount holders.”

Establishing this Fed-Postal Service connection could, as an extra benefit, secure a bright future for local post offices all across the country and help move the Fed toward becoming a true public bank, a democratically managed institution that puts the well-being of the American people over the private financial industry’s bottom line.

“Our financial system is rigged against the people in favor of a wealthy elite,” sums up the Public Banking Institute’s Ellen Brown. “Crisis is when change happens. This is the time for advocates to unite in demanding change on behalf of the people.”

Sam Pizzigati co-edits Inequality.org. His recent books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Follow him at @Too_Much_Online.