Bank of America, Adam Smith and a Fee Market System

Oddly enough, shortly after the announcement of the imposition of its new fee, B of A’s website mysteriously seemed to have a great number of problems and was actually nonfunctional for a number of days. The bank claims it was the result of site maintenance and heavy traffic. What say you?

When you think about it, Durbin and Moynihan are actually referring to the principles established more than three centuries ago by Adam Smith in his pioneering work “The Wealth of Nations.” In a democracy, capitalism has a few very simple rules, chief among them being that businesses can set prices and fees however they may like, and consumers can choose to go somewhere else if they don’t like them. Isn’t this what a free society and a competitive economy are all about? Nobody can tell the bank what to charge, and no one can force the consumer to pay it. There are lots of customers and lots of banks to choose from.

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Unfortunately, not everybody remembered Adam Smith. On one of the Sunday talk shows, President Obama, responding to a question about what can be done about those fees, said “This is exactly why we need this Consumer Financial Protection Bureau that we set up that is ready to go,” Obama said. “This is exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening.”

Whoops…

Unwittingly (and, as always, with good intentions) the President set back the cause of the CFPB dramatically (though he has since done some backpedaling). No one on either side of the aisle really wants an agency that can simply dictate fees. Later in the same interview the president also talked about such fees being administered “fairly and transparently.” He’s dead right on that one. It is within the government’s bailiwick to make sure that consumers are well informed, that disclosure of fees and risks is robust, and that unfair or deceptive practices are banned. But in a free society, the authority of any government should end right there.

[Related Article: Obama Blasts BofA’s New $5 Fee]

Naturally, there’s a lot not to like about all of the new fees—B of A’s in particular, perhaps because the fee has certain sneaky features that evoke memories of so many other fees charged by banks and credit card companies. For example, if you don’t ever make a purchase in October using your debit card there’s no fee. But if you get cold chasing your kid around at 10 PM on Halloween, that three dollar latte will cost you eight. Okay, okay—but, at least everyone will know the deal. Whatever else is true about this new fee, it’s certainly not “hidden.” However, it’s manifestly unfair in the sense that it will affect those with better cash flow far less than those without. Indeed, the people who will be least likely to avoid the monthly fee are those with the fewest alternatives. This fee will be a lot harder to sidestep if you have a low limit credit card versus a high limit credit card, or have no credit card because you have lousy credit (because, perhaps, you lost your job due to the Great Recession).

But those are objections that consumers should make, not governments.

According to a recent survey, in 2011 for the first time in history credit card issuers earned more from fees than they did from interest on outstanding balances. This trend is likely to continue, and you should expect fees of every description to be increased, not to mention all of the new fees that can be conjured up going forward. I don’t like it anymore than you do, but I’d like to fight it with informed consumers seeking out clever and more efficient competitors, rather than by government price-fixing.

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