Sen. Richard J. Durbin, Illinois Democrat, is here to help. Grab your debit card and run. Thanks to the latest kindness from the Senate’s No. 2 Democrat, many of America’s 185 million debit-card holders soon will endure new fees and lose existing benefits. Other consumers can kiss their free checking accounts goodbye. Mr. Durbin’s bright idea even could shutter some banks…Under his his amendment to last-year’s 2,319-page Dodd-Frank financial regulation juggernaut, the Federal Reserve decreed a Cuban-style price control.” Deroy Murdock, ‘Wshington declares war on your debit card’, The Washington Times, May 27, 2011
First, let us be clear that a single Senator cannot impose his will on America. The Durbin amendment was passed by majority votes in the then Democrat-controlled House of Representatives and the Senate and was eagerly signed into law by President Obama. So a significant number of financially stupid politicians share responsibility for this harmful intervention.
What exactly has happened and what is at risk?
Banks currently earn 1.14 per cent fees to process debit-card purchases. So, for example, if a customer purchases a $100 product using his debit card, the bank will receive $1,14 on that transaction. If, alternatively a customer purchases a $1,000 product, the bank will receive $11.40 on that transaction. These fees cover banking costs and ensure that debit cards are readily available at no separate charge to the customer.
Post the Frank-Dodd-Marx-Lenin-Obama intervention, the situation will radically change. The Federal Reserve, acting under the new legislation, has decreed that banks henceforth must charge 12 cents per transaction, regardless of size or risk. A $1 transaction or a $1 million transaction will be charged exactly the same 12 cents. That sounds like a really smart idea, do you not think? Certainly something that Larry summers, or Christina Romer or Cass Sunstein would drool about while drinking their White House margharitas!
The new policy will impose significant losses on debit card transactions for participating banks. So, how will such banks react? Well, some banks may fail completely, a sure-fire way to expand the economy! Those hard-to-secure business loans will be even harder to secure as bank profits decline. To mimimize exposure, many banks will impose limits on the value of any single transaction where debit cards are deployed – aay $50 per transaction – if debit cards are issued at all.
Confronted with such restrictions, consumers will substitute credit cards for debit cards, with significant implications for the well-being of the nation. Debit cards offer individuals an incentive to drain their own bank accounts when purchasing commodities. This encourages thrift in household budgeting. Credit cards offer individuals an incentive to borrow from other people’s wallets and to wind up knee deep in debt.
Do I hear the words September 2008 out there in the ether? Maybe all Progressives love to live out there in some such accumulating sea of household debt!