As most Americans know by now the new law that limits the amount the big Wall Street banks can gouge merchants (and ultimately their customers) every time they receive payment from a debt card, went into effect October first.
Up until then the banks were charging merchants an average of $.44 per transaction -- almost four times their average $.12 cost.
The new law, sponsored and passed by Illinois Democratic Senator Dick Durbin despite vicious pressure from the banks, gave the Federal Reserve the power to set a "swipe fee" that would allow banks to cover their costs and receive a "reasonable" profit. The Fed ultimately decided --- over consumer group objections -- that a 100% profit was "reasonable" and allowed big banks to charge an average of $.24 per card swipe.
A hundred percent profit on revenue would be considered a pretty sweet deal by most small businesses, but it wasn't enough for some of the big banks -- most notably Bank of America. B of A decided that to offset its lost ability to siphon money out of middle class pockets by way of merchant fees, they would be more direct. They announced that to make up for their lost revenue, they would begin charging customers who used debit cards a flat fee of $5 per month.
Durbin -- and consumer groups -- immediately responded with a suggestion that the best way to protest the new fee was for consumers to vote with their feet -- leave B of A and get another bank that didn't charge such a fee.
That suggestion certainly makes sense. My wife, Congresswoman Jan Schakowsky, left Bank of America over a year ago to protest their opposition to the Dodd-Frank bill and moved her business to a community bank.
But there is a problem. The reason why the Durbin regulation on debit card fees was necessary in the first place is that the debit card market is totally uncompetitive. Before the law was passed, "swipe fees" were set by Visa and MasterCard -- who control 80% of all card transactions. In other words, they were not subject to competitive market pressure of any sort. They were fixed by the Visa-MasterCard duopoly.
According to FDIC data, five banks -- Bank of America, Wells Fargo, JPMorgan Chase, Citi Corp, and US Bank -- now control 57.86% of the retail banking deposits in the United States. The top ten banks control 70.7% of deposits.
Bank of America by itself controls almost 20% of the market. That's not competition, that's oligopoly. And that allows the big banks to think they can assess their customers more and more in fees because there is so little competition in the retail banking sector to stop them. Not only does each of these banks have a disproportionate share of the banking business, but the big banks are counting on consumers deciding that it's just too much trouble to change banks.
Once you're a bank's customer it's not just a matter of withdrawing your funds and opening an account somewhere else. You have to change your automatic payments to vendors that many people now pay online. You have to change your direct deposits. Maybe you have a loan at a bank, or credit cards or some other incentive to stay put. Let's face it, in the modern world it's a pain to change banks.
The combination of the difficulty in changing banks and the limited competitive pressure that results from an oligopoly truly stifles price competition.
For the discipline of a competitive market to work, traditional competitive theory requires that several key criteria be met. A truly competitive market in the classic sense requires that products are interchangeable (like commodities), that consumers have perfect information -- and most important that no single market participant control a large enough share of the business to set the "market price." If the conditions for competitive markets pertain then classic economic theory holds that the "market price" should settle at the marginal cost of each new product.
In the corn market, the price goes up and down. No seller of corn has enough market share to control it independently -- each seller has to take the competitive "market price." If you do have enough market share to control the price you are said to be "cornering the market" -- and that's illegal.
But that's not true in what economists call "administered price" industries like the market for autos, or banking -- where there are so few sellers that market participants can in fact set their own prices for products which they go out of their way to differentiate from their competitors. In these cases the role of the government is to assure that no one controls such a large share of the market that they are not subject to at least a reasonable level of "market discipline." That's what the anti-trust laws are all about.
History shows us that there is a natural tendency for big market players to gobble up more and more market share -- a natural tendency toward monopoly.
That means that the use of markets to allocate resources -- the reliance on the market to "discipline" market players and assure that all of the other economic laws of supply and demand function -- requires that Government act as a referee.
The simple fact is that without Government acting as a referee in the economic game you get the same kind of behavior you'd expect if you didn't have a referee -- or any rules - in a basketball game. The biggest, meanest, players -- those most willing to cheat -- would always win. We'd have an economic "wild west," law of the jungle where the economic equivalent of gunslingers and gangbangers would rule the world. Consumers -- and our economic futures -- would be the victims.
Unfortunately that's pretty much what happened in the decade-long run up to the financial market meltdown that lead to the Great Recession.
After the last great market collapse and the Great Depression, three key laws -- coupled with aggressive use of fiscal policy -- prevented a recurrence for almost half a century.
They included the Federal Deposit Insurance Corporation to guarantee the soundness of banks, the Security and Exchange Commission to guarantee transparency and create rules for the stock market, and the Glass-Steagall Act.
Glass-Steagall prevented traditional banks -- the kind that take depositors' money and then loan it to individuals, or to productive endeavors -- from setting up operations that engaged in riskier activities like investment banking or venture investment. Coupled with rules from the FDIC, Glass-Steagall in effect required banks stay in the business of loaning money to individuals and businesses based on their fundamentals -- whether they generate enough income over time to pay the loan back -- and whether the collateral could fully cover a loss.
Glass-Steagall kept banks out of purely speculative activity -- where the investor is basically betting on whether the value of an asset will go up or down, not on the ability of the individual or enterprise to generate revenue and profit. Banks couldn't bet on Credit Default Swaps or other exotic derivatives.
That changed in the 1990s when Glass-Steagall was repealed. Of course what is surprising is that Congress had a preview of what was to come before they voted to repeal. A few years before, Congress had de-regulated Savings and Loans -- which pretty quickly resulted in the meltdown of the Savings and Loan industry and a big bail out. But its growing power allowed Wall Street to have its way with Congress. They said they wanted to "modernize" the banking laws.
Generally in Washington, when a special interest says it wants to "modernize" something -- grab your wallet.
Aside from intertwining traditional banking with financial activities that are very little more than professional gambling -- the other effect of Glass-Steagall repeal was to clear the way for massive consolidation in the financial sector. Retail banks merged with investment houses. The result is the domination of the financial market by a few financial behemoths like Chase, Citi-Corp, Goldman Sachs, and Bank of America.
Remember there is nothing "economically efficient" about giant financial institutions -- no real economies of scale. But there is a major impact on the concentration of economic power. Price competition disappears -- not only in the retail sector, but in market for stock issue underwriting, credit and debit cards. The giant banks become "too big to fail." And what's worse, their ability to control government -- to control Congress -- skyrockets.
As the big Wall Street banks grew in scale, so did their ability to extract more and more dollars from the real economy -- from the pockets of the middle class.
They did it by chipping off what novelist Tom Wolff calls the "golden crumbs" -- a fee here, a point of interest there.
From 1948 to 1980, profits generated by the financial sector represented from 5% to 15% of all U.S. business profits. Then they began to creep up -- and finally explode -- to an unbelievable 40% right before the Great Recession. They dropped briefly -- and by the end of 2009 they were back to 36%.
Let's remember that the financial sector does not make anything. Its goal is to take a little piece of every transaction as money flows through its hands.
In the last twenty years, the exploding financial sector has sucked the lifeblood out of the American middle class. It has vacuumed money out of the pockets of people who actually work for a living producing goods and services. It has siphoned off virtually every dime of economic growth so that real middle class incomes have actually fallen at the same time the economy has grown. That wasn't just disastrous for the middle class -- it was catastrophic for our entire economy. It meant that there weren't enough consumer dollars available to buy new goods and services -- a problem that was temporarily solved by the credit bubble until it ultimately collapsed and cost eight million Americans their jobs.
To put it simply, the financial sector -- and especially the big Wall Street banks -- are a huge cancer growing on our economy.
The Dodd-Frank financial reform bill did a good deal to begin to rein in the power of the big Wall Street Banks. But now it's time to address their concentration of economic power by breaking up those Wall Street banks - restricting their size as a percentage of the market -- and reinstating the Glass-Steagall Act that maintains a firewall between banking and speculation.
Let's make Bank of America remember the old adage: "The pigs get fat and the hogs get slaughtered."
Let's use their own greed to stoke the "Occupy Wall Street" sentiment that is -- quite correctly -- sweeping the country.
When you're done reading this column make two calls:
1) If you're a Bank of America customer, call and move your account to a community bank or credit union -- and make sure to tell them why you're leaving.
2) Call your Members of Congress and tell them the time has come to break up the big Wall Street banks once and for all.
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