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OpenMarket: Banking and Finance

  • CFPB's Database Should Be Bipartisan Privacy Concern

    November 12, 2015 4:43 PM

    ​The behemoth Consumer Financial Protection Bureau (CFPB) played a big role in Tuesday night’s GOP presidential debate on Fox Business, both during the commercials and in the candidate’s answers.

    A new ad by American Action Network that made its debut during commercial break correctly linked the CFPB—created by the Dodd-Frank so-called financial reform act rammed through Congress in 2010—to denial of mortgages and car loans due to the CFPB’s costly and paternalistic rules that hit Main Street bank and credit unions. The candidates critical of Dodd-Frank dinged those same policies, but often without naming the CFPB.

    Carly Fiorina called out the CFPB directly and for another disturbing policy. She pointed out that the CFPB is an entity with “no congressional oversight that is digging through hundreds of millions of your credit records.”

    The “digging” refers to CFPB’s massive database of mortgage and credit card info that rivals that of the National Security Agency in both size and intrusiveness. As former House Speaker Newt Gingrich wrote recently in The Wall Street Journal, “Every month the CFPB … gathers data on 22 million mortgages, 5.5 million student loans, two million bank accounts with overdraft fees, and hundreds of thousands of auto sales, credit scores and deposit advance loans.” My Competitive Enterprise Institute colleague Iain Murray and I have been writing about the troublesome database and its threat to privacy since the CFPB created it more than two years ago.

  • Freddie Mac's Loss Shows Need to Protect Taxpayers from GSE Raids

    November 4, 2015 8:34 AM

    I wish baseball great Yogi Berra were still here—upon the release of Freddie Mac’s new quarterly report showing a sudden Q3 loss—so he could offer his famous Yogism “it’s déjà vu all over again.” After seemingly smooth sailing under which Freddie and its sister Fannie Mae turned profits over the last couple years, this net loss of $475 million raises the specter of yet another government bailout.

    Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that many observers—from American Enterprise Institute scholar Peter Wallison to New York Times business columnist Gretchen Morgenson—say were the main cause of the financial crisis still face no requirement for any type of capital cushion. A coalition letter CEI helped put together just weeks ago warned that this lack of capital leave Fannie and Freddie vulnerable to sudden changes in the housing market.

    Fannie and Freddie were chartered by Congress around 45 years ago as companies with private shareholders but lines of credit with the government. In 2008, Fannie and Freddie were taken into conservatorship by the federal government to prevent them from collapsing. Pursuant to the Obama administration’s 2012 “Third Amendment” to the conservatorship, all of Fannie and Freddie’s net profits have been swept back into government coffers, leaving them with virtually no capital.

  • Equity Crowdfunding at Last, But Still Incomplete

    October 30, 2015 9:46 AM

    More than three years after the JOBS Act was signed into law by President Obama, the Securities and Exchange Commission (SEC) today will finally vote to approve equity crowdfunding rules. The final rule implementing Title III of the Jumpstart Our Business Startup (JOBS) Act of 2012, though late in coming, represent a first step for policymakers in getting public policy in step with America’s crowdfunding heritage.

    When a small firm grows by giving a community of funders a share in the profits—rather than just token items such as t-shirts—that’s known as equity crowdfunding. And it’s an idea whose time has come, because it is an idea that has always been here. Henry Ford, as I have written in a paper for CEI, crowdfunded among his friends and neighbors 100 years ago to build what is now Ford Motors. In pre-colonial days, Ben Franklin sold equity stakes in the fire insurance company he founded.

    But over the past few decades, the practice of equity crowdfunding has waned because of mounds of red tape from federal securities laws and the SEC. These rules—along with ever-more burdensome laws such as Sarbanes-Oxley and Dodd-Frank—have made it in many instances impossible to raise funds from friends and neighbors, as it could cost $1 million in compliance to raise $50,000. While fraud should of course be punished, showering innocent entrepreneurs and investors with prohibitive paperwork punishes the innocent.

  • CEI at Money20/20

    October 27, 2015 4:35 PM

    I’m here on the Las Vegas Strip at Money20/20, a trade show and forum in the area of FinTech—a term used to describe a cross-section of alternative lending, cryptocurrencies, and new payment technology—that is a pretty big shindig. At around 10,000 attendees, Money20/20 is fast becoming the Consumer Electronics Show (CES) of FinTech. Or as the show’s boosters might say, CEA is becoming the Money20/20 of tech.

    Anyways, some big news breaking here, such as JPMorgan Chase’s announcement of a mobile payments system to rival Apple Pay, and MasterCard’s “internet of things” initiative to enable mobile payments through keys, jewelry, and even clothing.

    But the real story are the thousands of entrepreneurs here looking demonstrate their products and spread the word through networking. The Exhibit Hall here is really a walk through the future.

    And I have had the privilege of a dialogue with these on how Washington red tape is hindering their beneficial innovations. This has been both in individual conversations and in an October 25 panel I was privileged to be a part of.

  • Onions Have No Futures

    October 27, 2015 12:10 PM

    Lots of people object to markets in certain commodities. Kidneys, archeological relics, adoption rights, and a host of more prosaic items have been deemed by critics to be the sorts of things that should not be bought and sold. Markets in these items have their defenders, of course, and generally speaking, there are relatively few things that are otherwise legal to possess that the federal government has deemed illegal to sell. Except onions. At least, future onions.

  • 33 Groups Call on Congress to Defund Portfolio Attack by Labor Department

    October 22, 2015 9:56 AM

    Today, a coalition letter signed by leaders of 33 leaders of free-market and conservative public policy organizations urges Congress to defund the Department of Labor’s (DOL) “fiduciary rule” takeover of 401(k)s and individual retirement accounts (IRAs). The letter, coordinated by the Competitive Enterprise Institute, states that Congress “must exercise its power of the purse” to stop this “action by the administration that has attracted bipartisan opposition owing to the massive negative effects it would have on Americans’ retirement savings.”

    Stretching to the bone its narrow authority over pensions from the 40-year-old Employee Retirement Income Security Act, the DOL has proposed a rule that would cause great harm to middle-class savers. This rule would severely restrict investment choices in savings plans such as 401(k)s and individual retirement accounts (IRAs), especially by poor and middle class investors, by forcing investment professionals to adhere to a one-size-fits-all definition of “best interest” for assets and investing strategies in these savings plans

    Stating right off the bat in the rule that Americans “can’t prudently manage retirement assets on their own” and that improved disclosure won’t help, the DOL would massively increase liability and fines for financial professionals who handle 401(k)s and IRAs, unless they choose assets and an investing strategies the DOL deems to be in investors’ “best interest.”

    As the coalition letter notes, such a paternalistic approach has attracted opposition virtually all congressional Republicans, as well as over half of House Democrats. Ninety-six House Democrats, led by progressive Rep. Gwen Moore (D-Wisc.), voiced concern in a recent letter to the DOL that the fiduciary rule could limit access to guidance on retirement saving for poor and middle-class Americans

  • Back to the Future in Payments Technology

    October 20, 2015 1:38 PM

    One of the things Back to the Future Part II almost got right about 2015 was how Biff paid for his cab ride—with a thumbprint.

    A lot of us can basically do this already, by signing into a smartphone with a ride app (Uber, Lyft, or even an app for traditional taxis like Curb) using our thumbprint. The difference is, we do it at the start of the ride and the payment is taken care of automatically by our pre-authorization.

    We can do this for other things too—a coffee at Starbucks or goods at the grocery store using Apple or Samsung Pay. All can be authorized by our thumbprint (even my little credit union allows my to authorize seeing my account balances with Apple’s Touch ID).

    All this is actually more futuristic than BTTF’s cab ride. The cab doesn’t need to have an expensive customer interface installed where they can authorize payment at the end of the ride. It’s all handled somewhere else. The cloud handles the process and feedback services letting the driver know we’re trustworthy—and letting us know the driver isn’t a maniac – handles the trust issue, allowing us to leave the car without handing over anything to the driver, not even a thumbprint, and assuring the driver that he (or increasingly she) will get a tip as well.

    So we don’t even need the thumbprint. Sorry, Mr. Zemeckis.

  • Warren Bullies Not Just Litan But Consumers

    October 5, 2015 11:31 AM

    Elizabeth Warren “drew blood,” writes Washington Post reporter Tom Hamburger. “Elizabeth Warren Claims Another Scalp,” reads the headline of an excellent piece by John Fund at National Review Online.

    The “blood” and “scalp” are those of Robert Litan, distinguished center-left economist and former high-level official of the Clinton administration Justice Department and Office of Management and Budget, who until recently was non-resident senior fellow at the liberal Brookings Institution. Litan, a friend of mine with whom I have engaged in conversations and civil disagreements, committed the “sin” in Warren’s eyes of going against the gospel of never-ending regulation. He and coauthor Hal Singer, an economist and senior fellow at the Progressive Policy Institute, authored a report that questions whether the costs exceed the benefits of the Department of Labor’s proposed “fiduciary rule” for IRAs, a regulation that I and others have called “Obamacare for Your IRA.”

    Even though Litan disclosed on the front page of the paper and prominently in his testimony before Congress that the study was funded by the Capital Group, a provider of investment management services, Warren complained to Brookings that Litan wasn’t specific enough in his disclosures. Never mind that that, as Fund points out, “it was Senate candidate Elizabeth Warren who, in 2012, played hide-and-seek with reporters for months when they asked for the names of her corporate legal clients.” Brookings, home to many former Democratic officeholders, caved and, according to press accounts, sought Litan’s resignation and received it.

    Yet it’s not just Litan’s scalp that Warren and her allies are really going for. They want the scalps of the vast majority of American consumers and investors, because they’re afraid of letting Americans use the brains under their scalps to make financial decisions. Though much of the coverage of DOL’s rule has characterized it as more mandated disclosure, in fact it is Litan who makes the case for better disclosure to improve options for consumers. Warren and the DOL bureaucrats, by contrast, argue that disclosure has reached its limits due to what they regard as Americans’ inherent intellectual limitations.

    As Warren wrote in 2008 when she was a professor at Harvard Law School, “cognitive limitations of consumers … put consumers’ economic security at risk.” Warren and her co-author Oren Bar-Gill penned some other choice passages about consumers and their “cognitive limitations”—as apparently opposed to the lack of those limitations by Warren, Bar-Gill, and the bureaucrats they have anointed—in their 2008 University of Pennsylvania Law Review article “Making Credit Safer.” Warren and Bar-Gill proclaimed that not only are “many consumers [] uninformed and irrational,” they are also uneducable. The authors refer frequently to the “limits of learning” and “why getting smarter collectively does not work.”

    As described by journalist Michael Patrick Leahy, Warren and Bar-Gill “argued that American consumers are, in essence, too simple-minded to understand credit and therefore must be protected by the federal government.”

  • Transparency in Card Fees: Where Does the Argument Stop?

    September 23, 2015 5:19 PM

    There are three ways banks that issue credit and debit cards can gain revenue from them: interest rates (in the case of credit cards) charged to consumers, fees charged to consumers via their bank accounts, and something called an interchange fee that the customer’s bank charges the merchant’s bank when the card is used. The interchange fee has long been the subject of resentment by merchants and so various arguments are used to promote the idea that these fees should be capped through regulation.

    One of the prime arguments used is that there is a lack of transparency in interchange fees and that a cap will promote transparency so that customers know that some of the price they are paying goes to their bank. This argument was one of the prime reasons why the European Union agreed to cap interchange fees earlier this year.

    Transparency, however, comes with its own costs. When the U.S. Government Accountability Office examined the options for disclosing interchange fees in 2009, it found substantial negatives for both consumers and merchants in requiring disclosure:

    Such disclosures could be confusing for consumers. Merchants, issuers, and card networks expressed concern that their customers might not understand the information and might misinterpret the fees listed on the receipt or bank statement as an additional charge, rather than as a component of the total price. Merchants told us that it is very difficult for cashiers to distinguish between the numerous types of debit and credit cards, which have varying interchange rates. Thus, it could be very complicated for a cashier to clearly communicate to the consumer the correct interchange fee for the specific transaction.

    Additionally, whichever party is responsible for disclosing information about interchange fees to consumers would incur the costs of updating its technology to allow for such disclosures. For disclosure in merchant receipts, merchants would incur the cost of changing their receipts. Issuers have reported that changes to card statements, such as the inclusion of additional disclosures, would generate costs for them.

  • Australian Reserve Bank Gets the Economics Wrong on Interchange Fees

    September 11, 2015 2:39 PM

    A new report commissioned by the International Alliance for Electronic Payments, of which CEI is a member, finds that the Reserve Bank of Australia misunderstood the economics when it first moved to cap interchange fees on electronic card payment systems. That cap was mimicked in the U.S. via the Durbin Amendment in the Dodd-Frank Act and more recently when the European Union decided to impose its own caps.

    The new report, written by Professors Sinclair Davidson and Jason Potts of RMIT University, finds that the Reserve Bank mistook an efficient, interdependent system for a monopoly. They write:

    In short, the Reserve Bank of Australia engaged in an extensive regulatory intervention based on poor theory, and no empirical evidence. Theory has not provided an unambiguous indication of market failure, and there is no empirical evidence to support the notion of monopoly pricing – other than a vague notion that interchange fees were “excessive”. What the Reserve Bank identified as being “externality” any fair minded observer would label “gains from trade”.

    We argue that interchange fees are the outcome of an efficient bargaining process given that banks and consumers, and banks and merchants form long term relationships with each other. For as long as there is competition in the banking sector and competition in the retail sector, the interchange fee itself is subject to competitive pressure.

    They also conclude that Australian consumers are likely to be worse off as a result of the regulation. That conclusion is echoed in the empirical research into the effects of the Durbin Amendment in the U.S., with several studies suggesting significant impacts on consumer welfare.

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