Economist Ludwig von Mises knew that one government intervention in the economy always begs another. Whatever perceived problem the government sets out to remedy, it usually makes worse. “In this way,” Von Mises wrote in “Deception of Government Intervention,” printed in Christian Economics (February 4, 1964), “the government is forced to add to its first intervention more and more decrees of interference until it has actually eliminated any influence of the market factors […] upon the determination of the ways of production and consumption.”
Financial reform in the United States is a case in point. The sprawling legislative monstrosity commonly known as Dodd-Frank affected every bank, insurance and investment company in the country except the two government-sponsored entities that caused the crisis by purchasing unprofitable subprime mortgage products en masse in the decade preceding the bust.
Dodd-Frank expanded the power of existing regulatory agencies, created an ill-defined Consumer Financial Protection Bureau and enabled the Federal Reserve to regulate the fees that bank can charge for debit card use with the Durbin Amendment, named after the Democratic senator from Illinois who set out to “protect” consumers from “unreasonable” premiums.
Before Dodd-Frank was enacted last year, the 2009 Credit Card Accountability, Responsibility and Disclosure Act had imposed restrictions on the terms and conditions of credit card services, requiring, among other things, that:
- Credit card provider allow for a minimum of 21 days for bills to be paid;
- Credit card providers lower the interest rates of clients who have paid their bills on time for six months in a row;
- Gift cards and gift certificates remain valid for no fewer than five years.
By restricting the ability of financial firms to cover credit risks, the regulation caused higher interest rates and fees immediately. This especially hurt small businessowners and low-income families who rely heavily on credit — the very people supposed to be protected by the law.
The Durban Amendment does the same. America’s largest banks announced late in September that they would begin charging a $5 monthly fee for debit card use. This must be the “reasonable” and “proportional” fee that they can charge under the Durban Amendment?
Not according to President Barack Obama. He accused banks in an interview with ABC News this week of “mistreating” customers with their debit card fees. So where do they come from?
The Federal Reserve, empowered by Dodd-Frank, determined that banks should charge no more than 24 cent per transaction, which is 45 percent less than the customary fee. The cap, which took effect on October 1, is estimated to cost the financial industry $6.6 billion per year in revenue. It says the central bank hasn’t sufficiently taken into account the indirect costs related to debit card use, including fraud and overdraft protection.
Debit cards aren’t the only things that customers now have to pay for. Free checking accounts are fast disappearing as a consequence of the new expenses and taxes enshrined in Dodd-Frank.
The sad irony is that especially low-income families will resort to credit instead of debit card use to avoid paying higher premiums for what is otherwise a smarter choice that should prevent them from amassing more debt — which is precisely what the amendment hoped to accomplish.