Topic: Finance, Banking & Monetary Policy

Senate to Limit ATM Charges?

The great thing about Cato policy papers is that even sometimes obscure topics are timeless, because government never rests when it comes to running our lives and restricting our choices.

Take the issue of bank ATM surcharges, those fees you can sometimes be charged for using another bank’s ATM.  Back in 1998, then Senator Al D’Amato proposed capping those fees.  Thankfully that effort failed.  I would like to believe one of the reasons for its failure is a 1998 Cato Briefing Paper by John Charles Bradbury, describing how ATM surcharge fees actually increase consumer choice by funding ever increasing ATM locations.

Well the Senate is at it again.  Senator Harkin has proposed an amendment to Dodd’s financial regulation bill that would cap ATM surcharge fees at 50 cents (it is not clear where Harkin came up with that number, perhaps his love of music).  The same flaws in D’Amato’s scheme twelve years ago hold true today.

The other great thing about existing Cato briefing papers is that it saves me the work of writing on the topic.  Just as well since I don’t believe I could improve upon Bradbury’s conclusions:

Consumers have the ability to obtain money from their bank accounts without paying a surcharge. ATM surcharges allow banks and other ATM operators to deploy machines in more convenient locations than might otherwise be possible. Customers who are unwilling to pay a surcharge incur the cost of inconvenience, while those who value the convenience more than the cost of the fee have the option of paying for it. Senator D’Amato, Rep. Bernie Sanders (I-Vt.)–Congress’s self-proclaimed socialist–and numerous consumer groups have formed an unlikely coalition to put an end to ATM surcharges. If successful, that campaign would limit the options of consumers, since there would be no means to support the more convenient ATM machines. Prohibiting ATM surcharges would only harm consumers by slowing the expansion of ATMs and reducing the number of ATMs currently deployed without making anyone better off.

Not Too Late to “Audit the Fed”

Last week I wrote about Senator Sanders’ “compromise” with Senator Dodd and the White House on auditing the Federal Reserve.  To re-cap, the compromise would drop any auditing of monetary policy and simply focus on the Fed’s emergency lending facilities.  See my previous post for why I believe that compromise is a big win for the Fed and a loss for the American public.

The good news is that Senator Sanders’ compromise does not end the debate.  Senator Vitter has filed an amendment (#3760) that mirrors the original Sanders’ amendment, including an audit of monetary policy.  With any luck, other Senators will be able to decide for themselves whether the Sanders-Dodd compromise offers sufficient transparency of the Fed’s actions.

I also highly suggest reading Arnold Kling’s recent Cato briefing paper on the issue, “The Case for Auditing the Fed Is Obvious.”

Europe’s Über Bailout

I’m semi-impressed with the Europeans for choosing the hog-wild approach to bailouts. Not because it is good policy, but rather because it will be a useful demonstration of the old rule that bad policy begets more bad policy (which begets God knows what, but it won’t be pretty). The background is that many European nations have been over-spending, over-taxing, and over-regulating. This has created a poisonous combination of weak economies, pervasive dependency, and political corruption, with Greece being the nation farthest down the path to Krugman-topia. Europe’s political elite at first thought they could paper over the problems with a $140 billion Greek bailout. The ostensible motives were to stop contagion and to demonstrate “solidarity,” but behind-the-scenes lobbying by big European banks (which foolishly own a lot of government debt from profligate nations such as Greece, Portugal, Spain, and Italy) may have been the most important factor. Regardless of the real motive, the original bailout was a flop, so the political class has decided to go with the in-for-a-dime-in-for-a-dollar approach and commit nearly $1 trillion of other people’s money to prop up the continent’s welfare states. The Wall Street Journal reports on the issue, noting that American taxpayers will be involuntary participants thanks to the financial world’s keystone cops at the International Monetary Fund:

The European Union agreed on an audacious €750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide. The money would be available to rescue euro-zone economies that get into financial troubles. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from an EU emergency fund and €250 billion from the International Monetary Fund. Immediately after the announcement, the European Central Bank said it is ready to buy euro-zone government and private bonds “to ensure depth and liquidity” in markets, and the U.S. Federal Reserve announced it would reopen swap lines with other central banks to make sure they had ample access to dollars.

Back when Greece first began to collapse, I argued that bankruptcy was the best option. And I noted more recently that my colleague Jeff Miron reached the same conclusion. Everything that has since happened reinforces this viewpoint. Here are a few additional observations on this latest chapter in the collapse of the welfare state.

1. A bailout does not solve the problem. It just means that taxpayers bear the cost rather than the banks that foolishly lent money to corrupt and incompetent governments.

2. A bailout rewards profligate politicians and creates a moral hazard problem by letting other politicians think that it is possible to dodge consequences for reckless choices.

3. A bailout undermines growth by misallocating capital, both directly via bailouts and indirectly by signaling to financial markets and investors that governments are a “safe” investment.

4. A bailout will cause a short-term rise in the market by directly or indirectly replenishing the balance sheets of financial institutions, but this will be completely offset by the long-run damage caused by moral hazard and capital misallocation.

The last point deserves a bit of elaboration. Assuming markets continue to rise, the politicians will interpret this to mean their policies are effective. But that is akin to me robbing my neighbor and then boasting about how my net wealth has increased. In the long run (which is probably not too long from now), though, this system will not work. At best, Europe’s political elite have postponed the day of reckoning and almost certainly created the conditions for an even more severe set of consequences. No wonder, when I was in Europe a couple of weeks ago, I kept running in to people who were planning on how to protect their families and their money when the welfare state scam unravels. Their biggest challenge, though, is finding someplace to go. People use to think the United States was a safe option, but the Bush-Obama policies of bigger government have pushed America much closer to European levels of fiscal instability.

Uncle Sam: Payday Lender

One of the puzzles of Congressional efforts to “reform” our financial system to avoid future crises is the amount of attention to lenders who had nothing to do with the crisis (almost as puzzling as the inattention to many who did).

Today’s Washington Post, for instance, details the efforts of payday lenders to fight back against both Senator Dodd’s new consumer agency and Senator Hagan’s amendment, that would essentially eliminate the consumer option of payday loans.

In general, any efforts to restrict consumer choice is rarely likely to improve consumer welfare.  This has been repeatedly demonstrated in research on payday lending.  Senator Hagan played a key role in banning such products in North Carolina.  What was the result of that ban?  Don Morgan, at the Federal Reserve Bank of New York, decided to test whether such a ban helped or hurt consumers.  He compares how households in North Carolina fared after payday loan bans.  The results: since the loans were banned in 2005 in North Carolina, compared to states where payday lending is permitted, households in NC have bounced more checks and complained more to FTC about lenders and debt collectors. “The increased credit problems contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced check protection sold by credit unions and banks or loans from pawnshops” states Morgan.

Where Hagan proposes to ban payday, Dodd proposes to have banks and non-profits directly compete with payday lenders, but with one big, important difference: taxpayers would cover a substantial portion of the credit losses.  Buried at the end of Dodd’s massive bill in Title XII is a grant program that would cover credit losses on “payday” loans made by non-profit community lenders as an “alternative to more costly payday loans.”  Of course the private sector loans will be more costly, as the lender will have to charge a rate that covers its losses.  The difference between Dodd’s proposal and the private sector is that while private sector payday loans may be expense, they are entered into voluntarily, whereas Dodd make the taxpayer an unwilling participant in subsidizing high risk borrowing.  Perhaps Dodd should examine previous efforts to subsidize high cost mortgage lending, before we repeat the same mistakes in payday.

Friedman and Moynihan Agree with Sanders and Paul

Reportage in today’s New York Times (“Consensus For Limits to Secrecy At the Fed” by Sewell Chan) indicates that more auditing of the Fed is probably in the cards.

Prof. Milton Friedman and Senator Daniel Patrick Moynihan would have most certainly agreed with the thrust of the Senate (S. 604) and House (H.R. 1207) bills sponsored by Senator Bernard Sanders and Representative Ron Paul, respectively.  These bills would partially lift the shroud of secrecy draped over the Fed.

Prof. Milton Friedman weighed in on central bank independence in a 1962 essay, “Should There Be an Independent Monetary Authority?”  Prof. Friedman’s conclusion: “The case against a fully independent central bank is strong indeed.”  As for letting in some sunshine, Senator Moynihan had this to say: “Secrecy is for losers.”

Federal Reserve 1, Transparency 0

It is being reported that the Senate has reached a “compromise” on Bernie Sanders’ amendment to audit the Federal Reserve.  This amendment was a companion to Ron Paul’s House bill that would have subjected both the Federal Reserve’s lending facilities and monetary policy to a GAO audit.  The compromise?  Drop the monetary policy audit.  It is hard to match Ron Paul’s reaction:  “Bernie Sanders has sold out.”

Congressmen Paul is 100% right on this.  While it is important to get details on the Fed’s emergency lending facility, those decisions are behind us.  The public has a right to know who benefited from the Fed’s actions, but the reality is that such an audit would change little going forward.  The real action is monetary policy.

After having spent seven years as a staffer on the Senate Banking Committee, I can attest that most senators, congressman and their staff have little understanding of the mechanics of monetary policy.  Just listen to any random appearance of the Fed chairman before Congress and you will immediately know what I mean.  But then, congressman in general don’t understand the workings of most federal programs.  That is one of the purposes of the GAO: to help explain to Congress how programs work and evaluate how well those programs are working.  I can think of no area more in need of such understanding than monetary policy.

Of course, some worry that an audit would undermine the claimed independence of the Fed.  For instance, former Hartford insurance exec, now Obama Treasury official, Neal Wolin praised the compromise, claiming the original language would “threaten the central bank’s independence from Congress.”  Sadly, Mr. Wolin is confused about the nature of the Fed.  If there is a constitutional basis for the Fed, it is Article I, Section 8’s delegation to Congress of the ability “to coin money, regulate the value there of,”  which Congress has delegated to the Fed.  The supposed independence of the Fed is from the Executive branch, not Congress.  And one of the very reasons for an audit is for the public to have a window into the dealings of the Fed with the Executive branch, most importantly the Treasury.  What Mr. Wolin and others are trying to protect is the favored relationship between Treasury and the Fed.  A GAO audit would shift the balance of power over the Fed away from the Executive and back to Congress, who despite its many problems, is directly accountable to the American public.

The gutting of the Sanders’ amendment is a huge win for both Wall Street and the Treasury (is there any longer a difference between the two?), and a massive loss and missed opportunity for the American public, and its representatives in Congress, to regain some control over an agency (the Fed) that has acted as a piggybank for both Presidents Bush and Obama.

Should We Break Up the Banks?

When it comes to banking policy, there are few people I respect more than Jonathan Macey and Arnold Kling; so when these two, independently, argue that we should be breaking up the largest banks, it is idea that merits consideration.  Yet I still have my doubts.

First, lets start with what we are fairly certain of.  There is a large empirical literature that suggest most US mega-banks are beyond their efficient size.  There is a good survey of the literature by former Fed Economist Allen Berger .  So, at a minimum, the academic literature suggests the largest banks are beyond a size that is justified by the social benefits.

However, there is also a small literature that suggests more concentrated banking systems are more stable, and less prone to crisis.  Some of this literature has grown out of research efforts by the World Bank.  While this literature is largely cross-country comparisons, recalling our own banking history gives several examples - the savings & loan crisis, the mass of small banks failures in the 1920s and 1930s, and current day Georgia - where lots of small bank failures have been associated with significant economic damage.  So, at minimum, there is some question of whether breaking up the largest banks would give us a more stable, less crisis-prone system.  In fact, there is considerable evidence to suggest that breaking up the banks would make our financial system more fragile.

To some extent, the debate over breaking up the large banks is about reducing political power.  The argument is that, because of their vast resources, these large banks unduly influence and capture our political system.  Undoubtedly, I believe the largest banks have substantial influence over both our legislative and regulatory systems.  However, so do smaller banks.  From my seven years as staff on the Senate Banking Committee, I would definitely argue that the Independent Community Banks Association (ICBA), as a group, has far more pull than does say Bank of America, as a single company.  One need only witness the various exemptions for small banks in the Dodd bill, for instance from the consumer protection bureau, to illustrate the lobbying power of small bankers.  One could also argue that the economic history of progressive era legislation, like the Sherman Act, is one of smaller, organized interests winning against larger sized firms.  Despite its appeal, the assertion that bigger is always better in politics is just an assertion.  Yet this is at heart an empirical argument, and perhaps one that can be tested.  Until then, I still have my doubts.