Banks May Fall Prey to Gov't Cost Reduction Ineptitude

Washington Pretends to Benefit Consumers

The Federal Reserve is proposing a new rule on banks — Regulation II — which it claims benefits consumers by capping the permissible interchange fee on debit card usage. While lower debit card fees may sound good, it is a lot more complicated than that.

The truth is this new regulation will harm consumers.

If the government caps fees, the biggest banks could likely absorb the loss in revenue. But small community banks, which are key to small business and entrepreneurship may have to shut down or find other ways to make up for the loss in revenue such as by raising fees or eliminating free accounts.

In fact, a recent study by the Consumer Bankers Association (CBA) concluded that minimum monthly balance requirements would likely increase. Likewise, monthly maintenance fees would likely be introduced or increased.

The study stated that consumers would likely have to pay up to $2 billion annually in new bank account fees.

While the uber-wealthy won’t suffer from such new and higher banking fees, the working class and lower-income households definitely would.

As an example, if government wanted to address the rising cost of fast-food, it might propose to regulate how much an order of fries can cost.

But if the fast-food restaurant has to pay its people, rent, and electric bills, it would then likely have to raise its prices on sandwiches and soft drinks.

So, the impact wouldn't help consumers.

Government isn’t good at reducing costs.

But robust competition helps keep costs lower.

To continue the example, if a fast-food restaurant tripled its prices compared to other eateries, it would likely soon go out of business.

The presence of competition keeps prices lower, and no costly, power-hungry government bureaucrats are required to oversee the program.

Regulation II may sound good if one doesn’t think much about it. But once one gives it even some brief analysis, it becomes clear that the Federal Reserve is simply engaging in a public relations effort to appear to be benefitting consumers. In reality, though, they are simply expanding their power under the guise of consumer benefit.

As I discuss in my latest book – "Let Freedom Ring… Again" – we don’t have monarchs or dictators in America with unlimited powers.

We have a Constitution, in which the federal government has specifically limited powers.

For example, it cannot force you to eat vegetables, play chess, or comb your hair.

And it cannot dictate the details of how banks compete for our business.

Upon closer examination, it doesn’t appear that the Federal Reserve even has the authority to issue Regulation II. There is no statute that gives the Federal Reserve a general power to micromanage how banks compete for our business.

But for the past 40 years, courts have been allowing agencies to expand their authority well beyond any statutory authorization.

Such inconsistencies have come about because of a U.S. Supreme Court case known as Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), which held that unless a government agency’s claim to power or its interpretation of a statute is unreasonable, the court would defer to it’s claims.

Thus, under the principle of Chevron deference, an agency’s claim to power could be weak and even silly, it just couldn’t be unreasonable.

Consequently, courts became a rubber stamp for the growth of bureaucratic power and bureaucracies that learned that they could act with impunity.

This has led the government to gobble up power and authority with a voracious appetite.

Fortunately, this summer, the Supreme Court overturned Chevron deference in Loper Bright Enterprises v. Raimando.

Thanks to Loper, bureaucrats can no longer rewrite laws to grant themselves more power.

Now rather than merely deferring to a federal agency’s claims of authority, the courts must actually review whether they acted within the bounds of a specific law.

Regulation II is well outside of the Federal Reserve’s statutory authority and so if enacted, will be overturned by the courts, as it should be.

In the world of high inflation, in which many Americans are struggling to keep up with their bills it's not helpful to make working-class and lower-income Americans lose many of their banking options.

This would only make banking more expensive.

All so government can pretend it is helping consumers.

Simply stated, Regulation II is a bad idea and will harm consumers — especially less-well-off consumers.

But that is not all, Regulation II is beyond the Federal Reserve’s legal authority.

It's important that we require our government to abide by our Constitution and our laws, that we do not allow bureaucrats to behave as if they are monarchs or dictators with beyond unlimited powers.

George Landrith has served as president of Frontiers of Freedom, since 1998. He is a graduate of the University of Virginia School of Law, where he was Business Editor of the Virginia Journal of Law and Politics. He is also the author of "Let Freedom Ring . . . Again." To learn more about Frontiers of Freedom, visit www.ff.org. Read George Landrith's Reports — More Here.