Dodd-Frank Punishes Consumers, Threatens Banking Crisis

Congressional hucksters sold last year’s “Dodd-Frank Wall Street Reform and Consumer Protection Act” as a pro-consumer effort to prevent future big bank bail-outs. The good news, according to the U.S. Government Accountability Office, is that Dodd-Frank expanded big government payrolls by nearly 3,000 new positions and seven new agencies. The bad news is the bill has destroyed 130,000 private sector jobs, will cost consumers $11 billion in fees, and is doing a fine job of creating a new American bank crisis.

The U.S. House and Senate took only 21 days to pass the Dodd-Frank Act. And it was signed into law by the President on July 21, 2010 as the largest overhaul of banking in our nation’s history. The massively complex Act is 2,300 pages long and a masterful piece of crony capitalism, which explains why Congress passed the bill before anyone could actually read it.

The public was deeply concerned by the rushed passage and has never been in favor of the legislation. A recent poll by FTI Consulting found that only 12 percent of the public were satisfied with bill, while 54% were dissatisfied. A large majority, 66%, believes the act is insufficient to protect against future bailouts. These opinion polls are about to go from concerned to downright angry as the public begins to learn how much pain they will suffer.

I estimate that the Dodd-Frank Act will cost banks in the United States $22 billion annually. Approximately one third of those losses will come from the “Durbin Amendment”, which was secretly inserted into the bill for the sole benefit of the merchandise retailing association. The language in the Act directs the Federal Reserve to set debit card swipe fees that “are reasonable and proportional to the cost incurred by the issuer.” Although this language looked innocent, it had the effect of cutting the $.44 per swipe fee banks receive to $.26 per swipe. When multiplied on the 180 million debit cards outstanding, the banks are required to transfer $7 billion of profit to the retailers. To survive crony meddling by Congress in their private industry affairs, the banks have no choice but to begin firing another 130,000 staff and directly charging consumers for their losses.

With Dodd-Frank consumer elements taking effect on October 1, 2011, Bank of America became the first (soon to be standard banking practice) to announce they will charge customers a $5 monthly fee for each debit card they hold. According to Federal Reserve hearing testimony on implementing Dodd-Frank, consumers are doomed to lose other banking incentives for good customer status such as free checking and credit cards rewards programs. At the hearings, no one believed the retailers would pass any of their Congressional crony gains to consumers.

The debit card was actually developed by the banks to dramatically improve retailer profitability by reducing credit and fraud losses. Prior to debit cards, retailers took lots of checks and credit card payments from consumers. The cost of processing a bank issued credit card was approximately 3%. The losses from fraud and non-collection from checks and their in-house credit cards programs were over 4%. With the debit card swipe fee set at $.44 on an average of purchase of $38, the retailers were guaranteed 100% collection at a cost of 1.2% of the transaction. Given that 181 million Americans hold 425 million debit cards and use the cards to purchase $1.6 trillion in goods, debit cards increased retailer profits by $45 billion.

American banks have worked hard since the collapse of Lehman Brothers in 2008 to reduce their risk of insolvency by increasing capital reserves to reducing leverage. This stands in stark contrast to European banks that did not increase capital reserves and are once again in a banking crisis due to their two-to-three times greater leverage than the U.S. Unfortunately, the Dodd-Frank Act has the potential to once again severely cripple the American banking industry.

Supporters of bank reform claimed that since credit is the lifeblood of the U.S. economy to facilitate both investment and consumption, quick passage was needed to restore bank solvency. The crony bill that was passed into law shrinks credit availability and threatens another U.S. banking crisis by savaging bank earnings and punishing consumers. Senator Richard Shelby has an excellent description of the bill: “Dodd-Frank basically is, is a horror movie, a horror movie for the American economy, a horror movie for — if people are interested in taking risks and creating jobs.”