Tom Sgouros: Short Takes

Saturday, October 22, 2011

Tom Sgouros, GoLocalProv MINDSETTER™

 

Cicilline, bank fees

I see that Representative David Cicilline has introduced legislation to forbid bank fees like the $5 per month fee recently imposed by Bank of America on its debit card holders. These fees were essentially a byproduct of the Dodd-Frank financial reform legislation forbidding banks from assessing higher swipe fees from merchants for debit cards. What that earlier legislation did was to put a limit on a fee whose cost was hidden from consumers.

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Because the bank lobbyists were so effective in watering down that legislation, the swipe fee limit isn't especially draconian, and allows banks to charge merchants up to 24 cents for a transaction the Fed estimates costs about 4 cents to process. But banks screamed and yelled about the lost revenue, and now appear ready to pick it up by charging consumers directly.

In a way, replacing a hidden fee with an obvious fee is a win for consumers. Either way it's coming out of your pocket, but at least you know about it now.

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I support Cicilline's bill because it is a good idea, though, to continue to hem banks in on the fees they can assess. Over the past generation, the banking industry has moved away from making their money in economically productive ways to making it via fees. Across the industry, business lending operations have been slashed or eliminated, with only real estate and consumer lending really remaining. We need banks to make their money through credit, because that's what's important to our economy. What we've developed instead is an industry that uses its market position to extract fees from consumers -- what economists call "extracting rent" -- while its lending portfolio becomes less important to its bottom line.

Aside from the economic harm of losing an important economic resource, the transformation has also turned banks themselves against the rest of us. A bank that earns its money through lending will be concerned that the economy remain strong. A bank that earns its money through fees will be concerned that the dollar remain strong, which is a very different thing. What we have today is a strong dollar and a weak economy, and that's just fine for big banks, which have reaped astonishing profits over the past two years, while the rest of the economy has remained in the toilet. We need to realign the banks' interest with the interests of the rest of us, and if they won't do it themselves, Congress should act.

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Examining the Fed

Speaking of financial reform, Sen. Bernie Sanders of Vermont got an amendment to Dodd-Frank through that required the GAO to do an examination of conflicts of interest by members of the Federal Reserve governing boards. The report is out now and I'm sure you'll be shocked to know they found lots of conflicts and potential conflicts.

The report cites as a prime example Stephen Friedman, who was chairman of the New York Fed at the same time as he was a board member (and former chair) of Goldman Sachs and owned Goldman stock, too. Goldman wasn't regulated by the Fed at the time Friedman joined the board, so technically there wasn't a conflict yet. In reality, shall we say that it's not perfectly clear that Goldman's interests in, well, profit profit profit, were well aligned with the Fed's interests in a stable banking system?

The situation became even stickier when, during the financial crisis, Goldman was allowed to change overnight into a bank holding company, bringing it under the Fed's jurisdiction while at the same time making it eligible to get all kinds of free money from the Fed. Friedman asked for a waiver of the rules, but also bought more Goldman stock through an automatic purchase plan he'd somehow neglected to tell the Fed about. The report authors counted 18 former and current directors from 9 of the 12 regional Fed branches affiliated with institutions who got emergency funds during the financial crisis, including the CEOs of Lehman Brothers and JP Morgan Chase, Jamie Dimon. Jeffrey Immelt, the CEO of General Electric, was also a New York Fed board member, and GE received $16 billion in emergency financing at the time.

Technically, the Federal Reserve is owned by the banks it regulates. As we've seen, though, bank regulation is hugely important to the health of our economy. Because of this, the conflicts so apparent at the Fed cannot be allowed to stand. Sanders is now working on coming up with legislation to change the ownership structure at the Fed, a modest next step on the road to reforming our financial industry, but you have to start somewhere.

Pensions

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It's hard not to write about the pension fund these days. I'll have more to say about it next week but for now it's worth remembering that the cost of the financial crisis to our state was tremendous. Among other things, the state pension fund lost $1.8 billion in one year, over 20% of its value. We've made some of that back since, but this is a huge part of the unfunded liability.

But here's a question: banks and bankers not only brought us the financial collapse, but many of them made a ton of money during it. Why is it that teachers and janitors are made to pay that price?

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
 

 

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