REPOST – Capping Interchange Fees Is Not In Your Best Interest

Interchange fees had nothing to do with the financial crisis, and regulating them increases the cost of credit for consumers.

 On May 13, the Senate voted 64 to 33 to raise the fees on your credit card. 

 Indirectly, of course.

 Senator Durbin’s amendment to S. 3217, the “Restoring American Financial Stability Act of 2010,” limits interchange fees and mandates that they are proportionate to the charges incurred. 

 Interchange fees, also known as “swipe fees,” are the fees that a merchant pays to a cardholder’s bank for the cost and risk of offering credit to consumers.   

 Reducing interchange fees appears like you are helping small businesses and reducing the cost of credit transactions.  In actually, you are forcing credit card companies to increase their fees and decrease the issuance of credit cards.

 Todd Zywicki, of the Mercatus Center at George Mason University, explains it this way in WSJ:

 “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.”

 Think that’s just economist hullabaloo? 

 According to Zywicki, when Australian regulators imposed price controls on interchange fees in 2003, annual fees went up and rewards programs went way down:

 “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.”

 Interchange fees are not just a magic fee that monopolistic card companies impose on unwitting small businesses.  Interchange fees are generally the only compensation that credit card companies get for extending billions of dollars of credit to consumers.    

 Small businesses benefit too.

Merchants do not have to clear the transaction, insure that you have enough money in the bank to cover the cost, send you additional billings, or run the risk of having an in-house credit operation.  Instead, they spend roughly 2% per credit transaction to have the banks do this for them.

Not a bad deal.

Moreover, interchange fees had absolutely nothing to do with the financial crisis.  So why has interchange regulation been snuck into S. 3217?

Interchange fees have been a pet political project since 2007, when the House Judiciary Committee antitrust task force held the first hearing to study them.  In other words, this is something that Congress has wanted to regulate for a long time and has never had an excuse to do so.   

Now, barrages of non-germane amendments are being added to the financial regulatory reform legislation because this could be the last major legislation that the 111th Congress approves before the campaign cycle begins. 

I am concerned that the decision to include interchange fees on this regulation train  is ill-thought out. 

As history shows us, reduced interchange fees will result in higher credit card fees, less credit card rewards, and restricted issuance.

Just because interchange fees are confusing and a type of financial product, is not reason enough to regulate them.

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The Unsustainable Nature of Government Jobs

& why I am thankful for mathematical fraud


Hire Maria  = one job created

Hire-Fire-Rehire Maria = two jobs created

The Obama Administration is using some complicated math to calculate an economic recovery.

In the month of May, 430,000 jobs were created – all but 41,000 were government jobs.

The majority of government job growth comes from the hiring of Census 2010 workers.  However, undercover Census worker <Maria> describes how “jobs” numbers are manipulated by firing and rehiring the same workers.

This should come as no surprise after remembering the complicated math that arose from the $787 billion economic stimulus.

Despite the White House’s claim that the American Recovery and Reinvestment Act will create 3.5 million jobs, the private sector begs to differ.

The National Association for Business Economics (NABE) says that while employment stats will show job growth, the stimulus has had little impact for the private sector:

NABE conducted the study by polling 68 of its members who work in economic roles at private-sector firms. About 73% of those surveyed said employment at their company is neither higher nor lower as a result of the $787 billion Recovery Act.

Why is this a problem?

Because every single government job and every single six-figure federal salary must come from the American taxpayer.

This is from the American taxpayer – still facing 9.7% unemployment, falling stock values, and an upcoming rash of delinquent mortgages.

No, no, you may argue.  Tax dollars are not coming from the low-to-middle class American described in the statistics above.  Taxes are coming from the big businesses and wealthy investors who can afford it.

But that is exactly the point.

Big businesses and wealthy individuals hire people like you and me.  Moreover, big businesses are not immune from financial ruin (as we have certainly seen).  And the economic outlook remains tepid for businesses who are facing plunging revenues, lost investments, and the commercial property bubble.

Elizabeth Warren remarks about the latter:

“When commercial properties fail, the result is a downward spiral of economic contraction; job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities,” she said. “These are the same small banks that provide loans to the small businesses that create jobs and boost productivity. If hundreds more community banks go under the effect could be to dump sand in the gears of our economic recovery.”

Taking money from businesses to support government jobs is unsustainable.   This is true for the stimulus, U.S. Census employees, and whatever federal hiring boon comes next.

A federal employee always requires a constant stream of taxpayer dollars to compensate their salary, health care, and pensions.

A private employee requires $0 taxpayer dollars.

Truth be told, I am thankful if the Census job numbers are inflated.   That means less taxpayer money taken out of private production.

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Is BP’s Tony Hayward More Sincere than Tiger Woods?

BP exec and sports hero agree that actions speak louder than words.


Tiger Woods says,

“… People want to find out how I could be so selfish and so foolish. People want to know how I could have done these things to my wife, Elin and to my children.

As <Elin> pointed out to me, my real apology to her will not come in the form of words. It will come from my behavior over time.

It is now up to me to make amends. And that starts by never repeating the mistakes I have made. It is up to me to start living a life of integrity.”

BP’s Tony Hayward says,

“Americans and others from around the world rightly are asking many questions. How could this happen? How damaging is the spill to the environment? Why have efforts to stop the flow of oil and gas into the Gulf so far failed?

Of course, actions speak louder than words, so we are fully prepared to be judged by the quality and effectiveness of our future conduct. I am confident we will learn from these terrible events and the industry will emerge stronger, smarter and safer than before.”

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Happy Memorial Day Weekend

I’ll be taking a hiatis for the holiday – but I encourage you to catch up on your reading:

Hot Spot for Trafficking: Federal-Deemed Wilderness Area

Global Regulation that Nobody Can Escape

Politicians Plan for No Tomorrow

How To Save Cleveland

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Rich New Yorkers Running To Jersey Shores

Two blue states, in the red.   Both deal with state budgets very differently.  If you were rich, where would you live?

New York –  N.Y. Assembly Looks at Millionaire’s Tax

New Jersey  – We’re Not Raising Taxes, the Budget Freeze Worked

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Do You Fear A Double Dip Recession?

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets.  This is why the US is not recovering properly,” he said.

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GAS TAX: If at first you don’t succeed, try and try again

A proposed gas tax has been proposed 3 times in 2010.

First, for the Kerry- Lieberman cap and trade bill – despite Kerry’s adamant opposition to the contrary.

WSJ –   “There is no gas tax, never was a gas tax, will not be a gas tax, I don’t know where that came from, but it is just wrong. Period,” Mr. Kerry rumbled at a press conference in late April.

Second, for BP oil spill cleanup.

AP – Lawmakers want to increase the current 8-cent-a-barrel tax on oil to make sure there is enough money available to respond to oil spills.

Third, for tax extenders legislation, (bonus:  it’s a combo package).

From the Hill: <Senators> are proposing a tax increase on oil to pay for cleanup efforts, but an accounting loophole also allows them to use the extra revenue to offset the cost of a massive economic aid package.

They say all the excise tax proceeds will go to the Oil Spill Liability Trust fund, but they are also using it as a counterweight for unrelated spending, such as on a $1 billion summer jobs program.

The existing trust fund of $1.5 billion won’t cover the estimated $14 billion in Gulf Coast damages…so it has to be boosted.

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