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Friday, October 07, 2011

"Told You So" on Durbin Amendment

U.S. Senator Dick Durbin (D-ND) is outraged, urging a de facto run on Bank of America. President Barack Obama is disgusted as well, taking a swipe at banks in an interview with ABC News.

What's the beef?

Well, in recent days, Bank of America, along with SunTrust, announced $5 per month fees on debit card transactions. For good measure, Chase and Wells Fargo are testing $3 per month debit card fees.

Of course, what Senator Durbin and President Obama fail to mention is that these fees are the direct and predictable results of policies that they advocated and imposed on banks.

Specifically, the Durbin amendment to the 2010 Dodd-Frank financial regulation law imposed price caps on debit card interchange fees paid by merchants for each debit card transaction. The Federal Reserve carried out the price cap mandate, slashing the effective interchange fees by more than half, costing banks, according to various estimates, as much as $15 billion annually.

As the Durbin amendment was proposed, debated, passed and wrestled with by the Federal Reserve, SBE Council and many others were clear in terms of laying out what the inevitable consequences would be. That included, as spelled out in a June 2010 SBE Council analysis, that "price controls never work the way they are billed, always imposing costs that come in various forms, and usually hurting those meant to be helped," adding that the likely fallout would include increased costs on debit card and checking account services.

Predicting such an outcome required no great insights. Instead, all that's needed is a basic understanding of economics. As noted in another SBE Council piece: "Keep in mind that suppliers adjust prices in two ways. They can change the money price or the quality of the product. When government steps in to limit money prices, sellers can reduce the supply of the product, reduce the quality, and/or raise prices of related goods or services."

After handing out big bailout bucks to various financial institutions, the political winds have shifted, and now the banks are the bad guys, worthy of political bashing. But the banks are not to blame. Instead, it is public policy rooted in economic ignorance. Price controls on debit card interchange fees were inevitably going to result in costs and part of those costs have materialized in the form of debit card fees.

So, we have what can be called the Durbin-Obama bank tax on consumers, including, of course, small businesses that use debit cards.

All we can say is: Told you so.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

1 comment:

DD said...

It seems like every day someone is "discovering" another unintended side effect of the limit that the Federal Reserve placed on debit card transaction fees, which took effect in October. The thing about all these unexpected side effects is that they were all both predictable and described in some detail on our blog and elsewhere long before the interchange limit was enforced.

No one who was paying attention and had actually bothered to look into the numbers should be surprised. The type of situation we have here is strikingly similar to, although not quite as potentially disastrous as, the European crisis in that in both cases politicians and their advisors were cheerfully ignoring the experts' early warnings only to later declare, when it turned out that the experts had been right all along, that everyone was surprised with how events were unfolding.