The Free Checking Restoration Act of 2011

“Free checking as we know it is ending,” says the lead paragraph of a widely-read and tweeted story this week from the Associated Press. Noting Bank of America’s announced monthly charge of $8.50 for most checking accounts, the article reports that “almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services.”

And other reports have noted the possible demise of free checking at many regional banks as well. Daniel Indiviglio blogs for The Atlantic that “free checking will soon be something only economic historians talk about.”

But the tide of economic history doesn’t necessarily have to turn this way. As noted in both The Atlantic and AP, the primary reason for free checking going by the wayside is not market forces, but new regulations from Washington.

The main culprits in free checking’s demise are the Federal Reserve’s rules that severely restrict banks from charging overdraft fees when customers make debit card purchases that exceed the balance of their checking accounts and the amendment from Sen. Dick Durbin (D-Ill.) putting price controls on the interchange fees merchants pay to banks and credit unions to process debit cards. On Tuesday, as noted in the AP story, Bank of America took a $10.4 billion charge against earnings from projected loss of revenue due to the Durbin amendment.

The rules were sold as “protecting” the majority of consumers, but in reality they shifted costs to responsible middle-class consumers from irresponsible consumers who didn’t keep track of their checking accounts. Some of the nation’s biggest retailers also used bank-bashing rhetoric to get  their share of corporate welfare at consumers’ expense. As The Atlantic‘s Indiviglio writes, “At this point, banks are forbidden from squeezing as many fees out of bad customers and have less freedom to charge merchants. So their only alternative is to demand more money from their good customers.”

I propose that, as one of its first orders of business when it convenes next January, Congress enact “The Free Checking Restoration Act of 2011” that would remove these cumbersome rules and will almost certainly result in competitive banks and credit unions offering traditional free checking to once again attract customers. The bill would get rid of the Fed’s overdraft rule and the Durbin amendment that puts price controls on merchant interchange fees.

Of course, as the economic expression goes, there is no such thing as a free lunch, and one could argue that free checking was “subsidized” by overdraft and interchange fees. Yet it is hard  to muster an argument from either a prudential or an egalitarian perspective in favor of the cost-shifting that results from the regulations to responsible middle and lower-income consumers with small accounts.

As my CEI colleague Hans Bader noted previously on OpenMarket,  “Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.” At Reason, Kathryn Mangu-Ward points out that, “for the most part, accounts with high balances, bank credit cards, or other products geared to the middle class and rich won’t be affected by these changes.”

But what about the minority of consumers “protected” by the overdraft rule who, as the AP story notes, were hit with a $35 fee because they “overdrafted their account by buying something small like a Starbucks latte.”  Since when was it written that there should be no cost for acting imprudently by not balancing one’s checkbooks. In the “good old days” before debit cards, folks who wrote bad checks would sometimes go to jail when one bounced — $35 seems like a much fairer punishment.

Liberals who have a problem with private institutions penalizing individuals for their behavior should think of an overdraft fee as a “sin tax” that discourages bad behavior in the same way the taxes they champion on cigarettes and increasingly on fatty food purport to do. It is no more an illicit cross-subsidy than the “subsidy” from reckless drivers paying fines that go to improve roads for drivers who obey traffic rules. Overdrawing bank accounts is certainly behavior society should discourage, so what exactly is wrong with private institutions — in innovative ways — doing so instead of the government.

And the Durbin amendment mandating “reasonable and proportional” interchange fees banks charge to merchants is completely indefensible even from an egalitarian redistributionist perspective. As Ryan Radia and I have written, capping interchange fees greatly harm consumers, community banks, and credit unions for the benefit of some of the nation’s wealthiest merchants.

Among those lobbying hard for the Durbin amendment were giant retailers like Home Depot, 7-Eleven, and Walgreens. On the Senate floor, Durbin even had the gall to invoke Walgreens lobbying him for the measure as a reason for its attachment to a bill whose ostensible purpose was to rein in “fat cats.”

These retailers benefit greatly from consumers using cards, both in increased sales and in protection from the costs of fraud from bad checks, yet they go charging to Washington to avoid paying fees for these services that the market allocates. How would Walgreens and Home Depot and other hypocritical retailers like it if the government suddenly mandated that they could only charge “reasonable and proportional” markup to consumers for the products they buy from suppliers?

At CEI, our mission is to make good policy good politics, and under current circumstances, promising voters the return of free checking accounts suddenly fits this bill. Since the  promise some 80 years ago of “a chicken in every pot,” political “freebies” have been a mainstay of modern campaigns.

Fiscal conservatives and libertarians usually look askance at these promises since most of the time they involve either spending a sum of money to bring the “free” good to certain member of the population or mandating that businesses spend to provide this good, and the cost will have to be made up somewhere. But  in this instance, Congress would not have to spend or mandate to provide this free good.

Rather, all it would have to do is remove misguided rules that were pushed through thoughtlessly in the Obama administration’s rush to regulate.