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Durbin Swipe Fee Watch V: Gas Retailers

Posted on April 23, 2012, 12:20pm | Victor Nava and Anthony Randazzo

It is time for another edition of the Durbin Swipe Fee Watch. 

Recall that the Durbin Amendment was a last minute measure added to the Dodd-Frank Act. The provision, which directed regulators to cap bank interchange fees-the fees banks charge retailers in order for the retailers to use the banks debit card-was naturally lobbied for hard by retailers. Regulators later set the limit at 21 cents per transaction, less than half of the average 44 cents per transaction prior to the rule.

At the time, Senator Durbin hoped that the lowered fees would reduce prices and amount to savings for consumers. That hasn't been how the movie has played out though. 

The most recent evidence comes from new research showing that while the automobile gas retail industry has achieved $1 billion in annual savings from the lowered swipe fees, these are not savings being passed on to consumers. Of the 134 billion gallons of gasoline sold in 2011 approximately 48 billion gallons were purchased using debit cards, and with the average savings for gas retailers of about 3 cents/gallon on debit card purchases courtesy of the Durbin Amendment, you get the $1 billion figure. The reduced swipe fees mean less cost for the retailers, but what about the consumers?

With debit as the overwhelmingly most popular payment choice at the pump (comprising of 36 percent of all transactions), the reduced swipe fees have essentially given the gas retailers a subsidy windfall rather than any savings for consumers. 

It is well documented that gas price averages were 26 percent higher in 2011 compared to 2010. Much of this could be blamed on the Arab Spring or Federal Reserve's QE programs driving up commodities prices. The data shows that consumers should be seeing a 4-5 cent discount for an average 16 gallon pump when they pay with debit. But with prices ever climbing the ill conceived Durbin Amendment has just put that money into the pockets of the gas stations.

While it is not necessarily a bad thing that small businesses (gas retailers) have reduced costs, it is a problem that this has come at the expense of other businesses (banks), all because Washington decided to pick favorites. Disguising their rule as somehow for the betterment of consumers has simply become a joke.

We predicted this back in 2010. Since Durbin Amendment's directed regulation has started its film reel many banks have ended debit card reward programs and flirted with monthly debit card fees. Retailers such as Redbox have even had to increase prices as a direct result of the Durbin Amendment. All of this has caused measurable harm to consumers, with little evidence of an aggregate benefit for them, and all this while big box retailers stand to make millions and more. The notion that businesses would voluntarily pass along these savings to consumers and that the banks would not find other ways to make up for lost revenues is baffling, and very short-sighted by the U.S. Congress.

Now in its fifth edition, the Durbin Amendment Swipe Fee Watch has reached the level of both the Rocky and Planet of the Apes movie franchises in that, like both Rocky V and Battle for the Planet of the Apes, you are now wishing the Durbin Amendment never happened. We all fear the release of the next edition.

Sheila Bair on the Prowl, a Guide

Posted on April 16, 2012, 8:40am | Anthony Randazzo

My first thought when I read the soon-to-be infamous Sheila Bair op-ed in the Washington Post this weekend was to laugh out loud and share the $10 million-loan-for-everyone suggestion with the driver of the taxi I was traveling in through downtown D.C. My second thought was "damn, I wish I'd had written the case against ZIRP like that." 

In fact we have written similar arguments as the former FDIC chairwoman articulated her humorous and cutting commentary. But not in the tone that she was able to articulate, shining a light on what has truly become a farce: the Federal Reserve's free money passed out in bulk to Wall Street to "support" the financial system. The idea Bair proposes is completely crazy, but that is the point. She is just articulating what Fed policy is for the financial system, and it is no less crazy to be handing them billions in free loans. 

Here is a guide to understanding the Bair tongue-anchored-to-cheek op-ed. First she writes:

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate? Under my plan, each American household could borrow $10 million from the Fed at zero interest. [...] Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

Such a suggestion is usually overheard at one of D.C. well attended liquor and beer distributing establishments. Well, except for the bond trading part. The difference between professional investors and Americans suddenly power-ball-lottery-winner rich is the disciple to "order up a few trades" as she puts it later in the piece. Theoretically, if everyone just bought sovereign debt and lived off the interest we could avoid an inflation problem of all that new money chasing far too few widgets made by a rapidly declining labor force. But it is much more likely that all that money would flow into the economy, ruining creditors who are paid back to complete the deleveraging cycle, but unable to buy much with the now worthless cash that has been paid back to them (via Fed helicopter).

Bair begins to expose her point when suggesting how the "carry trade" could be accomplished for America's new denizens of wealth: 

The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

This is actually what financial institutions have been doing with all that Fed money. The bailout was supposed to shore up bank balance sheets so the failed institutions could lend. Quantitative easing was supposed to free up capital from assets and let the fresh money boost the economy. Zero interest rate policy (ZIRP) has long been declared necessary to encourage borrowing and keep housing prices propped up.

But all this has done is contribute to a limping, recoveryless recovery. As we predicted in Reason magazine two years ago, we've been going "sideways" for a while. And that is Bair's beef with the Fed.

She also has a barb to throw at Congress:

Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

Fair point. When it comes to actually helping the economy, Congress goes AWOL. When it is time to score some political points, compromise abounds (under the cover of something substantive happening). Bair doesn't hold back from going after social issues either in the piece:

Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.

[...]

We can stop worrying about education, too. Who needs to understand the value of pi or the history of civilization when all you have to do to make a living is order up a few trades? Let the kids stay home with us. They can play video games while we pop bonbons and watch the soaps and talk shows. The liberals will love this plan because it reduces income inequality; the conservatives will love it because it promotes family time.

The frightening thing is that many of these attitudes are prevalent in American society even without the $10 million loans. 

The tax code is skewed. The answer is not to raise tax rates—the income tax system is a terrible way to tax a society and just slows down the economy—but that doesn't make the lower tax rates paid by wealthier segments of society any less damning. At the very least, the incentive structure of the tax code is set up to drive assets into many unsustainable things (like housing) and away from funding public liabilities (as Bair notes). 

Education is screwed up in America as well. Test scores are stagnant. High school graduation rates are sliding. Labor force mismatch issues are becoming an increasing concern. And it hasn't taken $10 million loans to end interest in math and history in many corners of America. 

So is Bair's solution viable? According to her, "This is the best American financial innovation since liar loans and pick-a-payment mortgages... Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923? That couldn't happen here. This is America." 

Touche. 

There will probably be more than a few out there who don't get the joke. But building on a pattern of loans without paper work to make everyone indebted to the Fed is not a serious policy proposal. Rather, her point is to channel the incredulous feelings of the readers into a criticism of the fact that the Fed does exactly this proposed idea, just with financial institutions instead of households. 

It is crazy and it has to stop. 

Bernanke Resolved to Favor Traders, Inflation, and Government Debt with Continued ZIRP

Posted on March 27, 2012, 1:59pm | Anthony Randazzo

Fed Chairman Bernanke told the National Association for Business Economics conference this week that the labor market was still in “deep” trouble and so we should expect ZIRP (zero interest rate policy) to continue for the next several years.

His comments stand in sharp contrast with the hyper-campaign-mode-minded Obama administration, which insists its policies since taking over are the reason why employment is improving. Ignore the data in these charts hidden behind the curtain though: White House unemployment projection and unemployment rate including labor market non-participants and dissatisfied part-time workers. 

Putting the politics aside, what Bernanke is essentially saying is that he prefers the trade off of propping up stock prices versus encouraging savings. 

He prefers low rates that enable federal borrowing to be more manageable in excess versus allowing housing prices to fall to their natural bottom and homeowner debt deleveraging to pick up steam. 

Just like his comments on the gold standard last week, he has it all backwards. The Wall Street Journal notes:

Mr. Bernanke argued, seemed likely to require "more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,"

The idea is that if consumers can borrow at low rates they can consume more. But since savings rates are next to nothing, ZIRP actually is dragging the consumer’s preferred preference of develeraging. So we don’t see housing hold debt declining very far nor is consumption carrying the economy forward.

The idea is that if businesses can borrow at low rates they will invest in their operations, hiring new workers with the cheaper cost of money. But since fiscal policy is threatening substantial regulatory and tax changes, and ZIRP itself creates inflation concerns, most new business activity gets sidelined in the uncertainty.

The idea is that with ZIRP, we can get positive inflation pressures that help stave off deflation. But deflation is often a good thing. Would you rather the price of iPhones go up or down? 

Finally, even if low-interest rates were the answer to jump starting the economy, they ignore that labor market problems go much deeper than the 2008-09 recession or the financial crisis. We have structural changes in the types of labor demanded in the U.S. that our workers are not well trained to accomplish. This is something that can’t be fixed over night nor can it be addressed by a simple economic growth upswing. 

From the WSJ:

(Video) Fed Doing Harm... to Savers

Posted on February 3, 2012, 5:57pm | Anthony Randazzo

Last night on Freedom Watch I questioned Fed Chairman Bernanke's ability to be self reflective after he suggested to Congress that they take care to "do no harm." While that is great advise and all, right now the Fed is actually causing harm itself, primarily to savers with its never ending zero interest rate policy (ZIRP).

At best, Bernanke seems to think that whatever harm is caused by ZIRP, it is less than the damage we would see without the monetary stimulus. ZIRP until 2014 signals the Fed thinks the economy is still in crisis (though President Obama's State of the Union address would suggest Treasury thinks otherwise). But the numbers suggest that ZIRP is what is causing the economy to continue in crisis mode. ZIRP has infused cash into the system, but it is just sitting in banks across America, not helping spur economic growth.

ZIRP has cut rates for savers, forcing many to move out of cash, money market funds, and CDs into stocks, which has inflated the value of equities. ZIRP has also cut rates for investors close to retirement, forcing them into riskier positions (also in equities). It may seem great that the Dow and Nasdaq are high has a kite, but the Fed is the one providing drugs for that high. ZIRP has also caused savers and investors in short-term, but low-yield bonds into long-term, higher-yield bonds that carry more risk of inflation if (and likely when) ZIRP backfires.

Simply put, ZIRP is huring the economy. We need to let interest rates move where the market takes them naturally. Backing up this view (at least on savers) is a column from MarketWatch.com's Chuck Jaffe in how savers shouldn't expect anything good for the next few years. He writes:

Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take its full bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising... In short, it will be at least 2015 before money-fund holders get anything approaching a meaningful return.

See his interview on Mean St. below:

Update 2/6: It appears that Charles Schawb also shares our sentiment. See this op-ed in the Wall Street Journal.

Durbin Watch IV: Redbox Edition

Posted on December 4, 2011, 4:29pm | Anthony Randazzo

This week we have a special edition of our Durbin Amendment Swipe Fee Watch, focusing on the elimination of discounts previously offered to merchants processing a large number of debit transactions for small purchases—i.e. $15 or less. A prime example of the impact of this is Redbox. 

Many of you are likely familiar with Redbox and their 28,000 locations nationwide. For the past few years Redbox has slowly eaten into the customer base of groups like Netflix and helped to put the nail in the coffin for Blockbuster. Why wander through shelves looking for a movie or wait for a film to arrive in the mail when you can just head down to a Redbox at a neighborhood grocery or convenience store, flip through a computer screen, and get the movie you want now? And for just a buck each!

Well, until now. 

Redbox announced last month it would be bumping its price from $1 per movie per day up to $1.20. Sure, not that much from a nominal perspective. But it is a 20 percent increase in price—$6 will now get you five movies (or five days of one movie), instead of six movies (or one movie for six days). Like a $5 debit card fee, it is one of those things that can be small but incredibly annoying.

Now, if the price change was a business decision by Redbox to generate more revenue because they thought they'd make more money as a result, that would be fine. Maybe a bad business decision depending on if it alienated their customer base, but reasonable. No one says $1 a movie is what they should have charged in the first place. 

However, the reason for the price change was not a supply and demand choice, it was because of the Durbin Amendment. Redbox has even said as much. We've written a lot about this provision of Dodd-Frank that directed the Fed to set a cap on fees that Visa and MasterCard can charge through the banks. This has cost banks $7 billion a year, and led to increased fees on all sorts of banking activities to make up for the lost revenue. 

One way that the lost revenue has been recouped is to end the discounts given to smaller merchants that generally handled smaller transaction amounts. As a result, some small businesses have actually seen their costs increase as a result of the Durbin Amendment changes. Redbox is one of those merchants that had been, until recently, treated as a small vendor since their locations were taking up just 15-square-feet of space apiece. But no more. Now charged 20 cents more per transaction, Redbox—which their relatively thin margins—has been forced to tack on the increase to the price for customers. 

The WSJ reported last week more on how other businesses are being impacted:

Business owners, who are receiving their first bills since the new rules took effect on Oct. 1, say in some cases they are now paying more than before—further reducing the already-slim chance that consumers would see lower prices as a result of the changes.

Bill Hardee, owner of the Warehouse Saloon & Billiards in Austin, Texas, says he recently tallied up his savings. The grand total: $1. He figured he paid $74 less on larger debit-card transactions, but that amount was offset by $73 in higher charges that he paid on small purchases. "I was a little dismayed," says Mr. Hardee, who spent more than $1,100 to process card transactions in October. [...]

The nation's biggest merchants, which are expected to see the most savings from the new law, generally aren't discussing the impact on their bottom line.

What is clear, however, is that some debit-card rates are rising. Intuit Payment Solutions recently advised customers that it is raising some rates by fractions of a percentage point and increasing the per-transaction charge by six cents, according to a customer letter.

"While we try to absorb interchange-fee increases, we sometimes need to change prices as a normal course of business," according to a statement from the company, which is a unit of Intuit Inc. in Mountain View, Calif. The company also said that it has lowered rates for transactions that fall under the new law.

Meanwhile, Heartland Payment Systems Inc., which processes electronic payments for small businesses, says it has passed on $25 million of savings to its customers as a result of the lower debit-card fees.

This just reiterates the point James Groth and I made earlier this month about Walmart and other large retailers being the main beneficiaries of the Durbin changes—which makes sense, since they lobbied hard for the change in Dodd-Frank, even though swipe fees had nothing to do with the financial crisis. 

This might come a shock, but one of the problems is actually embedded in the nature of the term "swipe fee." We use it here on the blog alternating with the phrase "interchange fee"—even though the later is more accurate. The phrase swipe fee developed because interchange is such an opaque term, but swipe fee doesn't convey the whole story. AmericanBanker profiled the term and its creator this past summer, noting:

As a prominent lawyer in the payments industry once told me, conflating interchange with the merchant discount is like confusing eggs and omelets. Regulating the price of eggs might make it likelier that omelets will become cheaper, but it doesn't guarantee that outcome. It's still up to the guy who owns the diner.

Merchants counter that it's a distinction without much difference, that this omelet doesn't contain much more than eggs. Brian A. Dodge, a spokesman for the Retail Industry Leaders Association, says interchange makes up 95% of the merchant discount. "It's pretty accurate to call it 'interchange,' " Dodge says.

So for everyone who thought the Fed could just cap the fee rate and see the savings automatically passed on to the consumers via retailers—this is why we complain about unintended consequences. 

Long-term Consumer Outlook

Posted on September 30, 2011, 12:08pm | Anthony Randazzo

The Michigan Consumer Survey for September came out today showing continued weakness in consumer sentiment, in fact consumers are 12.9 percent more dour now than they were last year at this time. The low reading of 59.4 is a bottom that hasn’t been scrapped since 1980.  

While the survey has some damning indications for consumption in the coming months, of particular interest in the survey is not just the index number, but the trend in answers to this question: “Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?”

Writing at Project Syndicate last week, Robert Shiller noted from the preliminary Michigan Survey numbers that the index based on this question had also fallen to levels not seen since the early 1980s:

...it appears spot-on for what we really want to know: what deep anxieties and fears do people have that might inhibit their willingness to spend for a long time. The answers to that question might well help us forecast the future outlook much more accurately.

Those answers plunged into depression territory between July and August, and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s. It stood at 135, its highest-ever level, in 2000, at the very peak of the millennium stock market bubble. By May 2011, it had fallen to 88. By September, just four months later, it was down to 48.

This is a much bigger downswing than was recorded in the overall consumer-confidence indices. The decline occurred over the better part of a decade, as we began to see the end of debt-driven overexpansion, and accelerated with the latest debt crisis.

We will want to watch this portion of the Michigan survey over the coming months for an indication of what the long-term consumer expectations are and how that might impact attempts to boost consumption. 

Shopping Our Way to Recovery

Posted on September 16, 2011, 4:04pm | James Groth

My colleague, Anthony Randazzo, wrote a column today pointing to the recovery of consumer demand as not being the solution to the economy’s core problem. Keynesians and especially pro-stimulus politicians assert that increasing aggregate demand artificially through fiscal measures will smooth a short-term fall in economic activity and eventually drive long-term economic growth. Sounds easy enough, however, such measures create distortions and push resources into areas that otherwise may not be necessary. While it is true that stimulus programs and increases to unemployment benefits boost demand in the short-term (I don’t believe any economist would deny that), they also change consumer behavior artificially, typically drawing money away from activities like saving and investment, not to mention expanding deficits, debt, and the market’s dependence upon government hand-outs.

I’ve taken the chart from his article and overlaid the year-over-year percent change in consumer credit for the same period to help demonstrate this point.

The chart shows that at the same time of the recovery in aggregate demand there occurred sharp increases in consumer credit. Ironically, ballooning credit was demonized as one of the main causes of the financial crisis as household savings rates actually dropped to negative levels prior to the credit bubble bursting. Now, expanding credit is apparently being encouraged. Total consumer credit hit $2.45 trillion in last week’s report from the Federal Reserve. By comparison that is the same level achieved in June 2007 and is only $130 billion off of its all-time high -- so much for growing savings and paying down debt.

America, however, is a consumer driven economy. Consumption represents nearly three-quarters of GDP. It is the main driver of growth.  But should it be the focus of government programs, and should it be how this country gets back on track? If savings and investment are what is needed throughout this employment recession and stagnation, why is consumer credit growing and consumption rising?

Below is a chart of retail sales vs. consumer sentiment since the beginning of 2005 – the same period as the chart above.

Consumer sentiment has trended with retail sales in nearly a one-to-one correlation essentially since the data has been tracked. Not surprisingly, when consumers feel confident about the future, and when they're employed, they buy stuff. When they don’t, they tighten the purse strings. Simple. But something has changed and broken this correlation.

Despite 9+% unemployment and fears about debt and the future (Michigan Sentiment today hit 57.8, near its lows), the American public is out and spending. We’re right back to what we as a country do best – borrow & spend.

Without the pressures of government misdirecting resources, we cannot diverge from these habits. Consumers are not incented to save because savings rates have been manipulated to zero. Government programs have crowded out private investment. An economy cannot grow if the only logical destination for money is in the cash registers of Saks Fifth Avenue.

Stimulus Redux: Breaking Down the American Jobs Act

Posted on September 16, 2011, 2:18pm | Anthony Randazzo

The American Jobs Act has not received a very warm welcome on Capitol Hill. Republicans have balked at many of the ideas in the package, and predictably rejected the idea of raising taxes to pay for the $447 billion proposal. In his speech, the President did a great political job of framing the debate as not about whether the plan will work, but whether Republicans will let the plan work. As a result, anyone criticizing the impact and economic effectiveness of the jobs plan appears to be attacking the idea of a return to full employment. That simply is just not true though.

If you look at content of the bill, you find that 67 percent is just a rehashing of programs in the Recovery Act of 2009 or some other bill since then. Another 13 percent of the American Jobs Act is just spending to continue already established programs. While there are new things in the bill, they are very few—and they are certainly not going to turn the unemployment situation or economy around. On Wednesday I gave a more detailed critique of some of the more frustrating parts of the bill, but here is a full breakdown and comparison of American Jobs Act components.

First, there are $300 billion worth of programs that have previously been done to little substantive impact on the economy:

.

Second, there are the Job Act components that just propose to continue existing programs:

• $49B to Extend Federal Unemployment Benefit Assistance Fund
• $5B to Extend 100% Expensing through 2012
• $3M for Additional Money to the Surety Bond Guarantee Fund 

And finally, what is left of the American Jobs Act that could be defined as "new" ideas are these things:

• Cutting payroll taxes in half for business and eliminate payroll taxes for hiring new workers or raising pay up to $50 billion (est. cost: $65 billion)
• Establishing a national infrastructure bank called the American Infrastructure Financing Authority and seeding it with $10 billion
• Using unemployment benefit money to pay employers to keep workers on part-time ($8 billion)
• Creating the Pathways Back to Work Fund that will give states money for programs for long-term unemployed to be trained, given cash to start a business, come up with their own programs (Georgia
• Works, Opportunity NC), a $4,000 tax credit for hiring long-term unemployed, to fund training for low-income youths (est. cost $5 billion)
• Creating a $5,6000 per worker tax credit for hiring veterans who have been unemployed for six months or more, and a tax credit of up to $9,600 if the veteran was wounded in combat (est. cost $n/a)
• Paying federal contractors faster
• Asking Congress to pass patent reform

So the question becomes, what is the point of this bill? As I said last week, the whole package appears designed to be stop gap measure that hopes it provides a little juice to keep unemployment in the 9% to 10% range and avoid a double dip recession. The Jobs Act misses all the big picture, long-term reforms that are needed. And it doesn't provide many of the short-term things that would be positive fixes without costing a lot of money. There are good reasons to criticize this bill, not from a partisan perspective, but a substantive perspective. Even hardcore leftist Jeffrey Sachs thinks it won't work. 

Nonfarm Productivity Revised Down

Posted on September 7, 2011, 7:29am | Anthony Randazzo

Nonfarm business productivity in the second quarter of 2011 was revised down from -0.3% to -0.7% last week. The Bureau of Labor Statistics number is the worst slide in productivity since the end of 2008—which was a pretty bad time in the economy if I recall. This is not a good trend since productivity and quality of life are interconnected. Here's the chart:

This downward trend is another indication that recovery from this contraction is not going to look like previous recoveries. We won't get the same jobs back—nor should we want them. Innovation is less productivity oriented and more geared towards efficiencies and automation. Recovery is going to require retraining, fixing the education system, removing regulations and occupational licensing barriers to entrepreneurship, not to mention entitlement reform and a tax code overhaul.

Tyler Cowen articulated further a few weeks ago (commenting on the numbers when they first came out) some of the deeper meanings behind these numbers:

These [poor productivity numbers] have helped to keep the labor market sluggish and have thwarted a potential recovery.

Yet these numbers don’t capture the entire issue, and are themselves plagued by an array of problems. One bias in the economic statistics — which never shows up in published revisions — is embedded in the health care sector, where third-party payments, subsidies and care quality are hard to monitor and measure. A result is that a dollar spent on health care does not necessarily mean a true dollar’s worth of value added. The United States spends more per capita on health care than any other country, yet without producing measurably superior results. To the extent that some of these expenditures are wasteful, the gross domestic product and productivity numbers overstate economic growth.

Here’s another problem: Expenditures on the military and domestic security have risen since 9/11, but those investments are intended to neutralize external threats. Even if you agree with this spending, it generally doesn’t produce useful goods and services that raise our standard of living.

One of the most commonly cited productivity numbers describes per-hour labor productivity, but this, too, has intrinsic flaws. Labor force participation has been falling for more than a decade, and low-skilled workers are leaving the work force in disproportionate numbers. Taking some lower-paying jobs out of the mix will raise the measure for average productivity, which is hardly the same as increasing the economic gains from a given set of workers or, for that matter, from putting more people to work by making them more productive.

It is increasingly clear that many of our current economic problems predate the financial crisis, even if the crisis accelerated them or brought them into clearer view. A recent study by E. J. Reedy and Robert E. Litan, both researchers at the Kauffman Foundation, found that sluggish job creation was a long-term trend. For instance, job creation from start-ups has fallen every decade since the 1980s, raising the specter of an America with an innovation shortfall.

In short, the employment problem is even worse than these productivity numbers would let on. See the whole Cowen piece in the NYT here.

Wells Fargo Customers Feel the Sting of So-Called Consumer Protection

Posted on August 22, 2011, 5:26pm | Anthony Randazzo

Round two of the Durbin Swipe Fee Watch:

On December 17, 2010 we wrote on this blog that if the Fed's proposed interchange fee rule (as ordered by the Durbin Amendment in DFA) that would limit banks to 12 cents per transaction from the average rate of 44 cents, that "Banks will also look to pull back rewards programs that gave cash back or built up points or airline miles..." 

Although the final rule was a 21 cent max charge, the basic argument still remained: an interchange fee cap will restrict bank revenues and force them to find other ways of increasing revenues or cutting programs. Today was another example of this prediction coming true:

After ending its debit rewards program for new customers earlier this year, Wells Fargo is now scrapping the program for existing customers as well. Beginning in October, customers who are already enrolled in the issuer's debit card rewards program will no longer receive points for making debit card transactions. In most debit rewards programs, points are awarded to customers for actions like spending, carrying high balances and making minimum deposits. Customers can then redeem the points they collect for cash or gift cards or even electronics.

The Wells Fargo program was hurting no consumer. It was totally voluntary. If the service was disliked, a consumer could go to another bank, or simply opt out of the rewards program all together. But somehow the interchange fee rule is "protecting" them. 

As we wrote in 2009 warning about a CFPB, it is protecting them to death. 

Making sure we are connecting all of the causation vs. correlation dots, here is why the program is ending:

"We made this decision due to new regulations that limit the amount of money merchants pay financial institutions for processing debit card transactions," a Wells Fargo spokeswoman said. "The new cap doesn't cover all the costs associated with offering debit cards, including processing, administration and fraud."  

Who's side is the government on? How many retailers have lowered their prices 21 cents? Are consumers any better off because of this regulation? No they are not. Retailers are happy to get more money, but they aren't the job generators needed to get the 6 to 8 million more workers necessary to end the unemployment slump. This is a total loss on the consumer side.

The warnings have been around for years. But in the rush to Dodd-Frank judgment, no one listened. Ironically, we even used Wells Fargo in a hypothetical example for how banks might react to this rule back in December.

Think about it like this: If you are PNC or Wells Fargo, and this rule goes in place, and you lose hundreds of millions in revenue by being forced to lower your interchange fee to a below market rate, what will you do? The debit card system is in some ways a closed cycle. You won't pull resources from other parts of the institution to cover a program that is now experiencing a loss. You will make up for the lost revenues with new fees, higher current fees, higher penalties, or reduced benefits.

There go the reduced rewards benefits. JPMorgan Chase and SunTrust eliminated debit card rewards programs earlier this year as well (see the first Watch post here). Bank of America has already increased checking account fees. It is all playing out as unfortunately expected.

P.s. An alternative name for our watch could be Swipe Fee Limits Limiting Consumer Benefits Watch—but that sounds like a federal agency.

The CFPB's Ironically Complicated Regulations

Posted on August 3, 2011, 4:00pm | Carson Bruno and Anthony Randazzo

The Consumer Financial Protection Bureau launched last month, without a confirmed director and with a slew of legislation attempting to fix its broken structure getting passed out of the House but stalled in the Senate. Sure, the world didn't end, but the threat to businesses and consumers from this agency that runs the risk of protecting them to death is still real. The CFPB website is now completely live, taking comments on regulations and disclosure form revisions, providing opportunities for consumers to vent about their bad experiences with lenders, and creating the guise of transparency. However, something is a little ironic-"don't you think"-about the CFPB's financial disclosure form rally cry compared with its own public notices.

Taking a line straight from the 1990's pop sensation Alanis Morissette, the CFPB has been arguing for simplicity and readability in financial disclosure documents since the Dodd-Frank Act created the bureau, yet if the average consumer were to go online to review and comment on one of the CFPB's proposed rulings, they find a document equally, if not more, horrendously complex than a credit card contract.  "Isn't it ironic," we do think!

Treasury Secretary Timothy Geithner commended Elizabeth Warren and the CFPB's actions to "simplify mortgage and credit card disclosures." During a House Oversight Committee Hearing, Elizabeth Warren, multiple times under oath, referred back to her and the CFPB's mission to ensure every consumer could fully comprehend disclosure forms. Warren insisted the CFPB's core mission was to enable all consumers to answer two basic questions, "Can I afford this and is this the best I can get?" 

The ironic thing about the CFPB is that the CFPB does not even follow what it preaches.  They demand simplicity and clarity from banks and other lenders, but their proposed rulings are neither simple nor clear.

Take a gander at the CFPB's notice and comment section of their website (see here) and click on their proposed rulings open for comment. As of July 28, there are two rulings open for comment: Alternative Mortgage Transaction Parity Act and Defining Larger Consumer Financial Product/Services Participants.  Both of them require intense scrutiny and understanding of laws, regulations, and economics, not to mention sheer will power, to read and comprehend the proposals. The first proposed ruling is 19 pages-with text in three columns on each page-of convoluted small-print legal sentences. Basically sounds like your credit card contract or mortgage disclosure form, doesn't it?  

For more on this topic check out other recent Reason posts regarding the CFPB's true motivations, Richard Cordray's past, and the problem with financial protection regulation.  

Richard Cordray as CFPB Director is No Better than Elizabeth Warren

Posted on July 18, 2011, 5:01pm | Carson Bruno

After a year of dithering, on Monday, July 18, President Obama finally nominated someone for the Consumer Financial Protection Bureau (CFPB) directorship—and surprise, surprise, it is not Elizabeth Warren, the chief architect of the CFPB. 

After months of turning Elizabeth Warren into the Saruman of the regulatory world, Republicans have at least succeeded in ensuring she won't take full control of the bureau on July 21. However, the alternate, Richard Cordray, shouldn't make conservatives, government skeptics, or consumers jump with glee. 

Cordray, currently the CFPB Director of Enforcement, is a staunch ally of Elizabeth Warren. So, while she may not be the titular head of the agency, don't think for the minute that she won't be influencing the direction of the agency. Yet, the ghost of Elizabeth Warren won't be the only aspect influencing the new federal regulator—Cordray, in his own right, has a history of pro-government interventionist policies.

After a stint as a clerk for Supreme Court Associate Justices Bryon White and Anthony Kennedy—not exactly allies of limited government and personal responsibility—and one term representing Ohio's 33^rd Congressional District, Cordray was appointed to the newly created Ohio Solicitor General position. 

As state Solicitor General, Cordray argued Household Credit Services v. Pfennig in the U.S Supreme Court, a case in which Household Credit Services was accused of inappropriately charging Sharon Pfennig an overcharge fee denoted under "purchases" versus "finance charges" on her credit card bill. While Household Credit Services claimed they categorized the charge correctly based on the Federal Reserve's definition, Pfenning claimed that the definition interpretation was misleading. The Supreme Court eventually upheld the lower court's ruling that the definition interpretation was sufficient and clear. However, this case provides a glimpse into Cordray's pro-government regulatory approach to "protecting" consumers—despite the fact that Pfenning had gone over her $2,000 credit limit and maintained her overage for months and Household Credit Services was completely within its rights to charge an appropriate fee, he still went after the company with a vengeance.

Cordray then progressed to the Ohio Treasurer's office following a failed Senate candidacy and subsequently elected, in 2008, Ohio's Attorney General. (Note, while Treasurer, Cordray institute a state real property inventory system that Reason Foundation has praised as a model for responsible stewardship of public lands and buildings.) 

As Ohio's AG, he sued Bank of America on behalf of Ohio's largest public employee pension program over allegations that BofA concealed information regarding their Merrill Lynch acquisition. His crusade against Wall Street on behalf of the "common" person continued with cases against AIG and others in a bid rigging case—AIG paid a hefty settlement, but has denied any wrongdoing. 

Cordray again found himself without a job after losing his AG re-election to former Ohio Senator Mike DeWine in November 2010.  However, his unemployment did not last long, as Elizabeth Warren hired Cordray on December 15, 2010 to serve as her chief regulation enforcer. Cordray described his new position as a prime opportunity to continue his AG activities on a national level "with more robust and more comprehensive authority" suggesting he firmly believes in the "Warren doctrine" that the CFPB has unprecedented, over-arching authority and powers.

It does remain to be seen if Cordray, or anyone for that matter, will really become Director of the CFPB. In May 2011, 44 of the 47 Republican Senators signed a letter to President Obama declaring they would prevent the confirmation of any CFPB director nominee unless the directorship is converted to a commission and brought under the federal appropriations process like nearly all regulatory bodies. Those 44 Senators have the ability to prevent Cordray from ever putting CFPB Director on his business cards or email signature and so far have not indicated they will back down from their letter.

The Republican opposition stems from the fact that the CFPB directorship is problematic on multiple levels. It gives a singular President entirely too much power to dictate regulations that in essence are extra-legislative laws, thus giving the President direct legislating ability. The current structure gives the Director too much authority to determine the breath of the CFPB's actions without any check and balances. And the budget CFPB has through the Fed requires no Congressional approval.

Ironically, the Democrats seem to be overlooking a future time when the Republicans have the presidency and can nominate their own CFPB head, potentially to gut the agency. And perhaps more devious Republicans would prefer the current structure so they can bide their time until the White House is back in their hands to address CFPB problems. 

But ultimately, the current Republicans have the right idea—if they cannot eliminate the CFPB completely, which would be the best option, converting the leadership to a multi-person commission, like every other regulatory body, will help ensure appropriate, balanced, and checked regulations. Nothing against Richard Cordray personally, but his nomination, while a battle victory for the GOP and limited government allies, is not the end of the war on over-burdensome government regulation.

Our Dodd-Frank Commentaries

Posted on March 15, 2011, 7:50pm | Anthony Randazzo

With the GOP looking to begin Dodd-Frank reform work, here is a breakdown of our commentaries last year pushing back on Dodd-Frank and suggesting alternative ideas:

• An Essay: Towards an Alternative Regulatory Philosophy to Dodd-Frank
• Dodd-Frank & Basel III Capital Requirements: Basel Accord Redux Redux
• Dodd-Frank & Derivatives: Breaking Down the Derivatives Market
• Dodd-Frank & the Federal Reserve: More Fed Power Won't Save the Economy
• Dodd-Frank & Fannie Mae/Freddie Mac: Ignoring the Gigantic Subprime Elephants (GSEs) in the Room
• Dodd-Frank & Rating Agencies: Senate Fails Government-Sponsored Rating Agency Reform
• Misplacing trust in regulators: Congress Didn't Learn Anything From the Financial Crisis
• Heavy handed regulations hurting businesses: Don't Break the Banks

See here for a breakdown of the GOP bills addressing Dodd-Frank reform.

Cramdowns Could Return

Posted on March 11, 2011, 4:28pm | Anthony Randazzo

There has been a lot of talk over the past several weeks about a plot by federal and state regulators to force banks to modify as much as $20 billion in mortgages for their role in robo-gate. I had a lengthy blog post about it last week recapping most of the issues. 

One big part of this is a long-time desire by some in the administration to force modifications and their attempt to push the issue in the back door. Cramdowns were shot down in 2009. HAMP has failed. But the proposed new servicing rules issued to banks (aside from the $20 billion penalty) could create a legal path to cramdowns by another name. From American Banker:

[If] state attorneys general prevail in settlement talks with the five largest mortgage servicers, Durbin may finally get his wish - with a twist. In addition to pushing banks to reduce mortgage debt in bankruptcy, the 27-page draft agreement would give Elizabeth Warren, the interim head of the Consumer Financial Protection Bureau, new authority to determine if all borrowers should receive a principal writedown.

"It's worse than cramdown," said Paul Miller, managing director of FBR Capital Markets Corp. "This is with Elizabeth Warren."

At issue are provisions in the draft settlement agreement, which must still be negotiated with the banks, which are designed to pressure banks into offering principal writedowns. If the agreement were finalized in its current form, banks would be required to set up a special loan modification process for bankruptcy cases. They would be encouraged to reduce principal to the fair market value of a property while other unsecured debt is discharged or, as part of a Chapter 13 plan, lower the borrower's interest rate to zero for five years and then reamortize at a market rate for 25 years after that point.

That, industry observers said, is largely the same as what Durbin was seeking.

"It kind of is like the mortgage bankruptcy cramdown," said Phil Swagel, a visiting professor at Georgetown University and a former Treasury Department official in the Bush administration. "It seems inappropriate. The robo-signing is terrible and any misdeeds should be dealt with ... but it seems this is an end run around Congress."

The banking industry isn't the only one that sees the similarity. A spokesman for Durbin said the draft agreement was close to what the Illinois Democrat was trying to accomplish.

See more here. 

Uncertainty

Posted on November 9, 2010, 2:20pm | Anthony Randazzo

Is uncertainty one of the reasons banks aren't lending and the economy remains lethargic? I'd say the answer is a clear yes. I've had this debate with a number of people in the past months. Most recently with Thom Hartmann. And all you really have to do is talk to bankers or small business owners to get a sense that uncertainty of regulations and taxes is holding the economy back. But Daniel Henninger summed up the view well in his column last week:

You cannot understand the way any business functions and then pass a 2,000-page law to regulate the health economy and then a 2,000 page law to re-regulate the entire financial economy. You cannot—in one year—load 4,000 pages of limitless uncertainty on the back of the economy and expect it to grow without Washington life support.

The solution?

Rather than wait for Barack Obama or Ben Bernanke to figure this out, Congress's new Republicans should look to do whatever they can to unlock and liberate the American economy. If this means tossing over some cherished provision in the famously titled "Dodd-Frank bill," such as the Consumer Financial Protection Bureau, so be it. Whatever is causing the uncertainty crisis, get rid of it.

Yes, getting rid of uncertainty would go a long way toward helping the economy. Which I say intentionally repeating myself from back in August.

If we dealt with uncertainty, then we'd just have balance sheet issues and a strong aversion to debt to deal with. Sigh.

What Could Go Wrong With QE2

Posted on November 6, 2010, 9:11am | Anthony Randazzo

On Wednesday the Federal Open Market Committee (FOMC)—the policy making body of the Federal Reserve—announced it is directing the Fed to buy $600 billion in Treasury bonds over the next 8 months. Since Fed Chairman Bernanke is convinced Congress isn't going to stimulate the economy, he has taken matters into his own hands. So, what exactly is the Fed doing, why, and what are the projected implications of this activity?

Quantitative easing (QE) is basically a monetary policy tool for expanding currency in circulation in order bring down long-term interest rates. Typically, the FOMC can just change the Federal Funds rate to manipulate interest rates, but with with that rate already basically at zero, the Fed has to take another tactic. The Fed already engaged in round of QE starting in 2009 with the announced purchase of $1.25 trillion in mortgage-backed securities from Fannie Mae and Freddie Mac and $50 billion in government debt.

The goal of QE2 is to lower long-term interest rates so that homeowners can more easily refinance and investors can borrow at lower rates to purchase assets, driving up asset prices. Furthermore, by buying government debt, the Fed will push down the yield on investing in Treasuries, meaning banks could need to look elsewhere for a return on investment, such as lending into the private sector or buying stocks—and that would mean more capital for business to work with and cheaper loans for small businesses. And on top of that, the expanded currency (aka, inflation) will weaken the dollar and help U.S. exports.

If it works, it is a much prettier picture for the economy. But if it doesn't work, there are some severe unintended consequences we may have to deal with—not the least of which is out of control inflation. Here are a few reasons QE2 might not work:

First, many are skeptical that QE2 can lower interest rates enough to have the targeted success. The goal is for interest rates to move 20 to 50 basis points (ex. from 3.75% to 3.55% or from 2.80% to 2.30%), but it is not at all clear that this is what the economy has been waiting for to take off. For example, homeowners are already flocking in droves to refinance. A lack of equity or cash on hand to afford a modification, the backlog of banks in working through all the refinancing paper work, and Foreclosure-gate are bigger reasons that refinancing has been slow.

Second, the problem isn't really a liquidity problem. It never really has been. Its been a confidence crisis and balance sheet crisis since the start. There is a lot of money in the system now. More than double the typical reserves held by banks, and some $1 trillion held by corporations waiting to invest. But if investors fear taxes, regulator burdens, or populist backlash, they won't invest. If companies want to work down their debt and banks want to stabilize their balance sheets, they won't invest. If there are fewer qualified borrowers in a chastened economy that still has a massive hang over from its debt binge, there won't be investment. Throwing money at the problem doesn't fix these things.

Third, the monetary expansion (literally creating money out of thin air, changing the numbers on a computer account, and printing the cash to back it up) is inflating the value of the dollar. On the one hand, this does help exporters in the short term because it makes American goods cheaper and easier to sell. However, it also means that investors get less of a return on their investment dollars because the value of the dollar relative to other currencies is shrinking. Put another way, if you invest in the U.S., the value of your profits will buy less goods elsewhere because of inflation. This means less investment in the U.S. and that means... less JOBS.

Finally, while the first round did keep interest rates low, it didn't spark a massive recovery. Since this is less money than the first time, the skepticism around QE2 is healthy. And that is not to mention that rates are already at historic lows and it is very possible QE2 won't hit the minimum goal for moving interest rates Even the Fed knows it is rolling the dice here.

And given the very real danger of inflation crushing the economy in the future, this is a dice role that wasn't wise to make.

Update: Here is another good summary of QE2 that is coming from a more objective stance if you want to take away my two cents.

One Reason the Economy Sucks in Graphs

Posted on October 27, 2010, 6:12pm | Anthony Randazzo

Yesterday I was talking with a medium-sized, regional bank vice president at the Mortgage Bankers Association annual convention in Atlanta about what it is going to take for banks to start investing their reserves in the economy again. His response was telling, "Get a better return other than with treasuries." Right now banks can borrow basically for free from the Fed, invest in government debt for a 3 to 4 percent return, and just sit on their hands until the uncertainly cloud over the economy clears away. And there is some $1.5 trillion under their hands that might be otherwise invested in the economy right now creating jobs and promoting recovery.

Here is a bit more visual presentation of the phenomenon:

Banks can borrow from the Fed or each other at rates of 1 percent or below.

A simple way of understanding the above chart is that the "Fed Funds Rate" is the rate at which banks borrow money from each other, the "Discount Rate" is the rate banks can borrow from the Federal Reserve, and LIBOR (the London Inter-bank Offer Rate) is a rate at which banks can borrow from each other or the public. But by any measure, it is cheap to borrow right now.

Then banks can invest that money in Treasury notes earning as much as 4 percent.

Combined that equals this:

If banks were unable to earn easy money off of treasuries, they would have to put more of their capital to work to earn similar profits, drawing down reserves.

In normal times banks were holding under a trillion in reserve. Now banks are holding onto a lot of their money. Certainly not all of it. And there is private sector lending. But it is very limited. The whole right side of the above chart represents cash that could be invested in the economy (meaning job growth), but isn't right now. Banks are holding on to their cash for a number of reasons: uncertainty about taxes and regulation, an aversion to risk, and an increase in consumer savings.

And that is one big reason for our lethargic GDP growth and fledgling unemployment.

P.s. One could argue that banks should have kept more because of their risks, but if they had put the same money in less risky investments, they would have been fine with the same reserves.

Here Come New Bank Fees

Posted on September 15, 2010, 12:10pm | Anthony Randazzo

Bank of America is announcing new fees for services in the wake of lost revenues stemming from Dodd-Frank. Congress tried to "help" consumers by restricting banks from charging fees on debit card transactions (interchange fees). But banks can't just ignore hundreds of billions in lost revenues. They will have to make that up with reduced services or increased costs. For BoA, both hits are coming:

Bank of America will charge clients new monthly fees if their accounts do not meet a minimum balance, the bank's CEO Brian Moynihan said on Tuesday.
"We will increase the account balance minimums or charge monthly fees in lieu thereof, which is the choice of the customer," Moynihan said at a Barclays Capital conference in New York.

These and other measures will allow the bank to compensate for revenue lost due to new regulations put in place following the 2008 financial crisis that led the US government to salvage many bank with massive bailouts, he said.

"Over the next 12 months, we will reset the entire product line." Bank of America has recently introduced a new account, called e-account, offering reduced fees for customers using automated services, while reducing the number of branches and staff in a bid to cut down costs, he added.

"That provides the customer with a choice, a monthly fee or to be served through automated means in these statements."

Read this whole story from Breitbart News here.

Also remember that they also tried to help consumers with the CARD Act... but that too just led to an increase in fees and interest rates, much to Congress's chagrin.

Business Start-Ups Creating Jobs

Posted on September 2, 2010, 8:35am | Anthony Randazzo

A recent report from Tim Kane, a senior fellow at the Kauffman foundation points to business start-ups, which need a confident capital market to really thrive, as the sole source of job creation in this economy. Vivek Wadhwa breaks it down:

Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977.  What this showed was that startups aren’t just an important contributor to job growth: they’re the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually. [...]

Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

This should raise some questions about the validity of stimulus job "creation" numbers.

Read Kane's full report here.

More Limits on Credit Card Fees

Posted on January 5, 2010, 4:09pm | Anthony Randazzo

Todd Zywicki writes today in the WSJ:

Fresh off of its enactment this summer of new regulations on consumer credit card terms, some in Congress want to go further—to impose a national usury ceiling on credit card interest rates and limits on interchange fees (the price that credit card issuers charge to merchants that accept their cards). That caps on interest rates harm consumers is well understood. But price controls on interchange fees would also result in consumers paying more and getting less. [...]

What would happen if the Merchants Payments Coalition gets its way and politicians squeeze interchange fees? Credit cards are essentially a closed economic system: A reduction in interchange fees will have to be offset by increased revenues elsewhere or a reduction in costs. For example, issuers could try to increase the revenue generated from consumers through higher interest payments, higher penalty fees, or reinstating annual fees.

Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.

Read the whole piece here.

Government to Set Credit Card Rates?

Posted on April 20, 2009, 9:00am | Anthony Randazzo

Last week NYC Councilwoman Melinda Katz reiterated her call for the government to limit the rates credit card companies can charge their customers. As Cafe Hayek blogger and economist Don Bourdeaux pointed out on his blog, this example is just another "ironic pitfall of government bailouts of private firms - namely, the inevitable demands by demagoguing politicians that recipient firms be hamstrung in their ability to respond to market forces." 

Katz said in a letter to the New York Times:

"When taxpayers are asked to recapitalize banks, they should not be charged for the privilege. Yet the cost of consumer credit has only increased since the first bailout package. While some conditions were imposed on shareholder dividends and executive compensation, there were never any provisions to protect consumers. This is unacceptable."

Bourdeaux responds:

"While I have no sympathy for any firm that accepted taxpayer funds, the fact is that a firm must be able to change its prices in response to changing market conditions if it is to survive in the market. By turning private firms into quasi-political entities, bailouts undermine their own ostensible purpose of making these firms strong and nimble competitors."

The frustration of Ms. Katz is understandable, that taxpayer money would fund a firm charging high rates for taxpayers. But if the firm is charging unacceptable rates it should be run out of business by the market, by people not using their services, and thus the firm closing down for lack of customers. But the government can't keep the firm alive and then complain about it's businesses practices. Either the business practices are necessary for its survival and acceptable given the supply and demand signals, or the practices aren't aren't acceptable and may have been while the bailed out firm was struggling to begin with.