Washington Should Resist Calls to Repeat the Mistakes of 2008
As Congress rushes to finish a must-pass rescue package to offset the economic effects of the corona virus, the danger increases that special-interest provisions are added to win the few remaining votes.
After the financial crisis of 2008, retail merchants rode a wave of anti-bank sentiment to regulate the fees that banks, card companies and payment-card processors charged them for moving debit card payments electronically between consumer and merchant banks. Known as the “Durbin Amendment” to the Dodd-Frank financial reform bill, the Federal Reserve was tasked with fixing the prices on interchange fees.
Now that the COVID-19 pandemic is wreaking economic havoc on nearly every business, another effort is afoot to “never let a crisis go to waste.” One retail trade association is asking President Trump and the Congress for “reduced credit-card interchange fees, expanding upon the Durbin Amendment under the Dodd-Frank legislation.”
Before policymakers go anywhere near that idea, they should remember that the Durbin Amendment’s promises to help consumers and small businesses proved empty.
We warned at the time that was a bad idea, and that price-fixing inflicted predictable shortages in banking services, mostly for the poor. Banks that offered free checking services were forced to limit free checking to those with higher average balances, pushing lower-income account holders to choose between paying higher fees for checking services or dropping out of traditional banking and moving to check-cashing and money-transfer services.
And, as economists Todd J. Zywicki and Julian Morris pointed out in their analysis of the Durbin Amendment’s effects, “many small businesses saw their costs increase and consequently raised prices or laid off workers. According to a Richmond Fed study on the effects of the Durbin Amendment, a majority of fast-food restaurants and grocery stores saw their debit costs increase — an outcome that is especially painful for lower-income families, which spend a higher percentage of their income putting food on the table than do wealthier households.”
A decade ago, seventeen Republican Senators went along with Senator Durbin’s amendment, but most of them later tried to repeal it after learning that its promised benefits were never passed along to consumers or to small businesses. The GOP’s former Durbin supporters who remain in office should warn their colleagues to resist the calls to be led down that same economic dead end.
Instead, before rushing to repeat the mistakes of the Durbin Amendment, Republicans and Democrats alike should remember that the people who were hurt most by the Durbin Amendment were lower-income Americans who lost free checking accounts or were priced out of banking services altogether.
Electronic payments have been one of the success stories in managing the work-from-home and social-distancing required to prevent the rapid spread of COVID19, and retail businesses are admirably meeting severe challenges – witness grocery stores managing large, complex supply chains and restaurants rapidly moving to a carry-out footing. Pitting these industries against each other in this crisis is bad politics and bad policy.
Americans rightly sympathize with businesses that are being severely challenged with the social distancing, loss of business, and uncertainty of the corona virus. But rather than looking to pass special-interest legislation in a panic, businesses, workers and consumers should be looking to support a consistent government policy aimed at maintaining the health of all citizens and all businesses alike.
Timothy Lee is Senior Vice President of Legal and Public Affairs at the Center for Individual Freedom.