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Source link: http://archive.mises.org/15045/why-the-price-controls/

Why the price controls?

December 17, 2010 by

Visa and MasterCard were slammed yesterday by the announcement of the Fed’s new price controls on swipe fees for merchants using the cards. This regulation is obviously horrible for consumers and producers and issuers – it is just bad all around and represents a backward step in economic progress. No way will small business benefit, contrary to the claims.

I can’t even imagine what the Fed is thinking here. The logic here seems just about as unsophisticated as anything to come from these people in a long time…many months even. In any case, I’m puzzled. I understand why the Fed bails out big banks (they are friends). I understand the real reason the Fed inflates the money supply (government likes that). I understand the underlying rationale behind most legislation given that it is constructed to benefits the elites at the expense of the people. But I do not get this. I’m asking the question: who benefits from this regulation? What’s the special-interest dynamic at work here?

{ 24 comments }

J. Murray December 17, 2010 at 9:39 am

It’s almost like the thought process is, “We haven’t regulated it yet, therefore we must.” They aren’t even trying to come up with some sort of sweet sounding excuse anymore.

Legend December 17, 2010 at 9:40 am

This is classic vote bank politics. The democrats have to show they did something for the common man. This allows them to show that they are friends of the consumer.

Ohhh Henry December 17, 2010 at 10:21 am

If the mortgage crisis was engineered and was not merely an accidental consequence of bad policy, then it appears to be aimed at wiping out small- to medium-sized banks leaving only a handful of super-large banks with nearly all of the mortgage business in the USA.

Is Goldman or JPM also thinking of taking over the credit card industry? If so then greater regulation would tend to remove the smaller players from the field and give an opportunity to bigger players to take over.

Dave Albin December 17, 2010 at 10:40 am

I thought all we had to do was spend a bunch of money and everything would be OK? This goes against even the government’s logic.

RWW December 17, 2010 at 10:02 pm

Actually, lower swipe fees could be seen as leading to more consumer spending, which is supposed to be the magical economic elixir.

Franklin December 17, 2010 at 10:42 am

“Who benefits from this regulation? What’s the special-interest dynamic at work here?”
Poster Legend states it nicely: the politician benefits, of course.
And the voters buy into it.
Where libertarians err, I believe, is thinking that the politician consciously is analyzing vote totals as he creates policy. In most cases, the pol believes in what he does. The paradigm is one of the hero protecting the populace. Ostensibly, they are “elected to protect the little guy.” Now certainly, to continue to protect, one must continue to be re-elected and they embrace this dynamic.
But don’t mistake it, the rank and file Congressmen believe they are doing right. And they address symptoms rather than the disease.

Rick Weinle December 17, 2010 at 11:22 am

If this policy increases debit card use, the Fed will have a better tool for tracking consumer expenditures.

Julien Couvreur December 17, 2010 at 2:04 pm

But will this actually encourage debit card use?

One could argue that the service provider will have to reduce the quality of the service, to stay profitable. Therefore customers would likely use the service less (comparatively).

Erik B December 17, 2010 at 2:46 pm

Or eliminate the service entirely.

CK December 17, 2010 at 11:49 am

Let’s recap the facts: The Fed didn’t initiate this; rather, they were tasked with implementing the “Durbin Amendment” (from Dick Durbin) which was attached to the financial overhaul bill.

TCF Financial (ticker TCB) is actually suing the Fed on the grounds this law is unconstitutional. The law only applies to banks with over $10 billion in assets I believe; to make a law pertain to only a small group of companies based purely on their size is discriminatory and therefore unconstitutional.

On another point, this is simply price regulation. There is an interview with TCF CEO Bill (William) Cooper who makes a good analogy that this law not only limits the profits, but will force banks to offer this service as a loss. This would be akin to “making burger king sell a hamburger for less than the price of just the bun”.

The law requiring banks to have customers “opt-in” for overdraft made some banks stop offering the service all together. However, the problem with debit cards is that they are a vehicle of transmission, to drop them would be like offering a checking account with no checks. If the law isn’t struck down, look for the large banks to get creative in making up this lost revenue in other ways; e.g. higher ATM fees, higher checking account fees or flat out fees per debit card use.

BioTube December 17, 2010 at 12:22 pm

Could be a PR move; the Fed’s probably in CYA mode because of the rising tide of resentment.

CK December 17, 2010 at 12:22 pm

The interview I was referring to is on CNBC. Surprisingly, the Minneapolis Star Tribune gets most of it right: http://www.startribune.com/opinion/editorials/107339718.html

Also, just to clarify, I am not trying to support the Fed in any way – just wanted to state that they didn’t originate this.

Ryan December 17, 2010 at 12:29 pm

Why take the Visa/MC statements at their face value? In the end price controls mean that potential new competition will have a harder time justifying the initial investment. I see it as a win for the existing behemoths, who may have to downsize to make the numbers work but who will in the end have less pesky upstarts to deal with.

bob December 17, 2010 at 2:06 pm

I can buy this. Generally all regulation is harmful on its face. It ends up being a net benefit for some players, however, because they gain or keep market share they didn’t have or would have lost even if their marginal rate of profit falls.

Brian Foglia December 17, 2010 at 5:39 pm

I scrolled down to post this argument. Good to see that someone beat me to it. Visa and Mastercard can handle price controls. I assume they already do so in other countries in which they do business. This is yet another boot in the face of any potential competitor.Plus, as mentioned above, its a big PR move for the Fed and politicians, who will claim that this protects consumers and small businesses from high fees.

JC Hewitt December 17, 2010 at 2:14 pm

Pretty simple: legislation like this pushes the price of bribery upwards. It demonstrates that companies need to proactively bribe legislators to avoid destruction. Bribery can’t just be reactive – to major legislation – it has to also be used as a preventative, ongoing measure.

It’s like the wiseguy walking into the restaurant and “accidentally” bumping into a table at a restaurant, knocking all the china onto the floor, and then saying “Oops. I’m just so clumsy,” in a sarcastic tone.

Erik B December 17, 2010 at 2:38 pm

This increases the cost of banks giving away debit cards. I imagine that they’re trying to “encourage” banks to charge a fee for debit cards or get out of the business. Fewer debit cards will cause people choose to use their credit cards more over time.

IMO, the ultimate goal is to change the habits of individuals who don’t want to use credit by making it more expensive for them to use debit. The fed can print money, but they can’t dictate consumer attitudes. Right now banks are having some trouble lending partly because consumers are holding onto cash and paying down debt. They want to get those people back on the debt train and this is one way to, as I say, “encourage” people to used credit rather than debit. It is an attempt at controlling consumer behavior.

Mike December 17, 2010 at 2:58 pm

“Some men just want to watch the world burn”

Sorry, I couldn’t resist.

terrymac December 17, 2010 at 5:11 pm

It appears to be a net benefit for retailers, at the expense of the banks. Retailers will pay less per transaction; banks are likely to pass the costs on to consumers by some other mechanism, such as annual credit card fees – or to stop issuing cards altogether.

RichF December 18, 2010 at 6:17 pm

And this may help forestall the raising of consumer prices that is due to come from the pricing pressure building in the pipeline.

Vincent Cook December 17, 2010 at 7:19 pm

A price cap on debit card transaction fees benefits retail merchants at the expense of banks and card processors. It also creates a relative advantage for banks that rely more on monthly account fees and high account balances(i.e. fractional reserve lending) over banks that are encouraging debit card use.

It is noteworthy that the Establishment bailout queens like Chase and Citi are now jacking up monthly fees and minimum balances for what were formerly free checking accounts. Banks like TCF are a threat to them because TCF’s business model leans more towards generating revenues from transactions than revenues from high risk fractional reserve lending, as TCF itself clearly states on the “philosophy” page from their website:

TCF earns a significant portion of its profits from the deposit side of the bank. We accumulate a large number of low cost accounts through convenient services and products targeted to a broad range of customers. As a result of the profits we earn from the deposit business, we can minimize credit risk on the asset side.

Sree karanam December 18, 2010 at 3:13 am

“Small banks and credit unions say that any measure to reduce big banks’ fees would make it harder for them to compete with the large banks, and would force them to charge lower fees as well.” [from the article itself]
THAT is why Visa and Mastervard dont seem to mind it (despite the stock market’s negative reaction]. Now that Visa and Mastercard have lower [mandated] fees, the small banks and debt issuers also have to lower their fees in order to compete. Visa and Mastercard can afford this by either tansferring costs or handling the losses for the short term(because the reduced competetion ensure long term monopoly] but this will kill the Small banks because they can no longer survive by transferring costs ( since they cannot handle losses).

Dan December 18, 2010 at 8:07 pm

“But I do not get this. I’m asking the question: who benefits from this regulation? What’s the special-interest dynamic at work here?”

From the article:

“If implemented in their current state, the draft rules are a victory for merchants who for years tried to persuade legislators to reduce interchange fees, contending that banks are charging them too much for debit cards that are essentially no different than cash or checks. The Fed’s proposal suggests it was sensitive to that argument. ”

I suppose merchants have been lobbying for this, based on the above quotation. It will be interesting to see what the resulting distortion in the marketplace will be as a result of the price controls.

LS December 29, 2010 at 7:53 am

I am no economist, just a small business owner. 80% of purchases made at my business are with credit or debit cards. The credit card companies make more revenue on my business than my county does on sales taxes. That’s just crazy. There is no way that their costs to process those transactions are even a fraction of what we pay them.

From my perspective, there is a complete monopoly by VISA, Mastercard, Discover, and AMEX. If I refuse to accept one of those cards because their fees are higher than the others, my customers become very angry. Sam’s Club doesn’t accept Visa from customers with a regular membership. As a customer, that makes me angry, but it doesn’t make me stop going to Sam’s Club because I need to go to Sam’s Club. If people get angry at my small “mom & pop” business, they’ll just go somewhere else. To be competitive, I have to accept all of the cards. So, how can a small merchant put pressure on those companies to keep their fees down? It can’t.

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