Late last month, Bank of America announced that beginning next year, its customers will be charged a $5 monthly debit card fee. President Obama immediately blasted the banking giant, and U.S. Rep. Barney Frank, D-Mass., cried that consumers are getting squeezed.
As a longtime Bank of America customer, I was angry, too. My anger, however, isn’t directed at my bank. It’s directed at Barney Frank.
The economy, like nature, has a mysterious way of self-correcting, and each time the government tweaks that process, the “law of unintended consequences” kicks in.
Raise the minimum wage, and a college student can’t find a summer job. Declare the coyote an endangered species, and the West is overrun with the critters, leaving ranchers powerless to protect their livestock. Subsidize the production of ethanol, and the price of corn and corn-fed beef skyrockets.
In July 2010, Congress passed the Dodd-Frank Act, which is described as a sweeping reform of the financial industry. But what Congress calls “reform,” the industry calls micromanagement. Dodd-Frank, of course, was named in part after the aforementioned Barney Frank, who at the time was chairman of the House Financial Services Committee.
An amendment to the act (offered by U.S. Sen. Dick Durbin, D-Ill.) cut the fee that banks could collect from merchants when consumers paid with a debit card. It’s important to note that this fee was long established and negotiated at arms length. Congress nonetheless stepped in and cut the negotiated fee from 44 cents to 21 cents per transaction, which represents a huge drop in bank revenue. The loss had to be made up somewhere. Bank of America had already laid off 30,000 employees last month. When businesses cut all the expenses they can, they have no option but to increase revenue in order to survive – hence the debit card fee.
This isn’t the first time Barney Frank has run afoul of the law of unintended consequences. Remember the Community Reinvestment Act? How about the subprime mortgage crisis, which in turn led to a housing bubble, massive bank foreclosures and eventually even bank failures? Barney Frank’s fingerprints were all over those debacles.
Subprime loans, if you didn’t already know, are loans issued to non-creditworthy customers. The last thing banks want to do is write subprime loans. They earn money on the interest they receive when loans are repaid, not from foreclosing on the property used to guarantee those loans.
The Community Reinvestment Act was signed into law by Jimmy Carter to encourage financial institutions to serve the needs of their low-income community members. Nothing much happened with it until Barney Frank took the reins of the House Financial Services Committee. He decided to expand the CRA’s scope. He felt that everyone was entitled to home ownership, regardless of creditworthiness. The banks, of course, balked. In response, community organizers (including Barack Obama) sued the banks to force them into making bad loans.
When the banks continued dragging their feet, Fannie Mae and Freddie Mac began guaranteeing and even purchasing subprime loans, and in what many called a conflict of interest, Barney Frank was at the center of that. It’s interesting to note that while all this was going on, both Sen. John McCain, R-Ariz., and the Bush administration warned about the damage being done to the financial industry, including “Fannie” and “Freddie.” In response, Barney Frank said, “The more people exaggerate these problems, … the less we see in terms of affordable housing.” Affordable housing? By this time, housing prices were through the roof.
The final insult was when the government sued the banks for writing the very subprime loans that Obama years earlier sued them to make.
From the time we watched the evil Simon Legree on Saturday morning cartoons, to Lionel Barrymore’s depiction of Henry F. Potter in Frank Capra’s “It’s a Wonderful Life,” we’re bombarded with images that bankers are bad, greedy people. The reality is that they make a living by providing a service. The more that government interferes with that service, the more difficult it is to earn a profit.
The Dodd-Frank Act was drafted in response to the financial crisis in which Barney Frank played a significant role. It would have been far better had Barney resigned from Congress 10 years ago. Although his heart may have been in the right place, the road to “Bedrock,” like the road to hell, is paved with good intentions.
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