Thanks, Dick

Posted by Marc Hodak on December 8, 2011 under Unintended consequences | Be the First to Comment

Dick Durbin’s amendment to Dodd-Frank, capping fees on credit card transactions to 21 cents, is one of the most blatant examples of government price fixing implemented in a long time.  In this article, we get a good glimpse of one of the unintended effects of this law:

Just two months after one of the most controversial parts of the Dodd-Frank financial-overhaul law was enacted, some merchants and consumers are starting to pay the price.

Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.

That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts.

The stated intent of government price fixers is almost always to lower costs to consumers.  Their premise in these matters is that particular vendors (in this case, credit card processors) charge arbitrarily high prices for their stuff, and a price cap will keep the prices from getting too high.  The assumption is that sellers will simply eat the resulting losses without any other changes in their business practices, i.e., that the sellers will transfer their gains to the buyers without altering the amount or quality of what they sell.

I don’t believe that Dick Durbin is a Marxist, nor Mssrs. Dodd or Frank or very many of the clowns who voted for this fiasco of a law, but the premise and assumption above are Marxist premises and assumptions.  A market-oriented economist with an Ivy League PhD might come up with plausible exceptions to the premise that price controls create predictable distortions, that consumers will, in aggregate, pay the cost of those distortions via a net loss in economic welfare, and that those losses are likely to be concentrated on the very individuals who were promised the greatest benefits.  But none of those plausible exceptions were provided in support of this legislation.

This law was passed based on raw economic ignorance ground in those Marxist assumptions, even if none of the ignorami consciously (if not publicly) espouses Marxism.  They were simply, and I might add expertly, playing to the economically-challenged voting mob, or to special interests that believed they had something to gain by the careful application of the threat of police power to otherwise voluntary transactions between consenting adults.

The irony is that as the sellers begin to do what they will to adapt to this law, the law’s supporters will begin to see that response not as a market reaction to bad law, but as part of the conspiracy that made the law necessary in the first place.  They will see the effects of law not as a repudiation of the premises and assumptions behind the law, but evidence of its incompleteness in its drafting, and reason that the law’s reach must be extended in order to serve it’s stated (higher?) purpose.  The next Dick will carefully identify the places where the squeezed balloon has popped out, and craft amendments to push those errant bubbles back to their original form.

The Durbin Fee

Posted by Marc Hodak on August 22, 2011 under Unintended consequences | Read the First Comment

via Thom Lambert at TOTM:

Whoever would have guessed that Mr. Durbin’s valiant effort to prevent future financial crises by imposing brute price controls would have had these sorts of unintended consequences?

Thom is referring to the government’s regulation of debit card swipe fees.

Government price controls typically have three predictable (sometimes, though not always, unintended) effects.  Let’s see if they apply here:

Politicization of price setting:

Ben Bernanke, who apparently doesn’t have enough on his plate, was tasked with determining banks’ processing and fraud-related costs and setting a swipe fee that’s just high enough to cover those costs.  Mr. Bernanke first decided that the aggregate cost totaled twelve cents per swipe.  After receiving over 11,000 helpful comments, Mr. Bernanke changed his mind.  Banks’ processing and fraud costs, he decided, are really 21 cents per swipe, plus 0.05 percent of the transaction amount.


Complex market workarounds in response to “one-size-fits-all” price:

The WSJ is reporting that a number of banks, facing the prospect of reduced revenues from swipe fees, are going to start charging customers an upfront, non-swipe fee for the right to make debit card purchases.  Wells Fargo, J.P. Morgan Chase, Suntrust, Regions, and Bank of America have announced plans to try or explore these sorts of fees — “Durbin Fees,” you might call them.


Economic harm to the intended beneficiaries of the law:

Fortunately for me, I can just switch to using my credit card, which will not be subject to the price controls imposed by Messrs Durbin and Bernanke.  Because I earn a decent salary and have a good credit history, this sort of a switch won’t really hurt me… Of course, lots of folks — especially those who are out of work or have defaulted on some financial obligations because of the financial crisis and ensuing recession — don’t have access to cheap credit.  They can’t avoid Durbin Fees the way I (and Messrs Durbin and Bernanke) can.


Thom then proposes that subsidies may be on their way to those “protected” (i.e., disenfranchised) by this law, harkening Reagan’s famous quip about government action.

The SEC declined to comment

Posted by Marc Hodak on April 17, 2011 under Unintended consequences | Be the First to Comment

And why should they?  They didn’t write Dodd-Frank.  But they did lobby relentlessly for greater regulation of, and therefore greater control over, hedge funds.  Which led to this:

Jamie Nash, a hedge-fund lawyer in New York, said some start-up managers are nervous that they won’t be able to build an operations or compliance system that meets the SEC’s expectations.

The regulations “are erecting barriers to entry,” Mr. Nash said. “That is going to cause consolidation in the industry of smaller managers into larger managers who have the infrastructure and can afford this.”

A spokesman for the SEC declined to comment.

So, the government decided it had to increase regulations the one part of the financial services sector–hedge funds–that had nothing to do with the financial crisis.  And because the government felt compelled to spend gobs of taxpayer cash to bail out financial institution that were too big to fail, Congress created a raft of regulations whose main effect will be to crush entrepreneurship and compel waves of consolidation.

And the people who pushed for this regulation, who inadvertently insisted that the fixed costs of doing business in America are not yet high enough, will be shocked to find that only the big survive.  They likely will blame the big companies for the lack of real competition, or they will blame capitalism.  They may even blame the economics profession or discipline itself.

Governance regulations hurting the labor market for start-ups

Posted by Marc Hodak on February 28, 2011 under Invisible trade-offs, Unintended consequences | Be the First to Comment

A story today describes how start-ups are having problems:

Internet start-ups across Silicon Valley are struggling to compete for talent amid the investment frenzy gripping Facebook Inc., Twitter Inc. and Zynga Inc., with many smaller companies beefing up pay and recruiting and wading into the private-company share market to keep pace with their larger rivals.

Silicon Valley is full of world-class engineers sleeping on futons and living on ramen noodles.  These (mostly young) people accept company paper instead of the decent cash that their talents could easily justify for the privilege of toiling 14 hours a day in untested ventures.  This system depends upon well-functioning equity markets to secure this manner of devotion.  Public equity markets enable those making the gamble to see the payoff sooner.  Bill Gates has said that Microsoft never needed the public capital for investment in growth; the company went public to so that its 10,000 paper millionaires could become actual millionaires.  Many of them would go on to fund or work in other start-ups, and their example has fueled many more.

Today, our IPO market is broken.  That avenue of exit has been crushed by the weight of governance regulations, especially Sarbanes-Oxley.  These rules were intended to restore confidence in our public markets.  They have, instead, prevented ordinary people from investing in maturing companies like Facebook, Twitter, or LinkedIn, and hampered the ability of companies like that to attract the talent they need to get going.  Such companies are now forced to go to private markets for liquidity, markets that are far less accessible to smaller firms than IPOs used to be.

We will never know how many Microsofts or Apples have not been able to get off the ground since 2002–the year SOX was passed–or may not in the future, because of the higher cost of securing needed talent.  Unfortunately, the people who proliferate these rules like Topsy are not accountable for what doesn’t get created.

A basic right unconstrained

Posted by Marc Hodak on January 10, 2011 under Unintended consequences | Be the First to Comment

The horrible shooting in Tucson this weekend predictably took over the airwaves.   A multiple shooting may have garnered national headlines in any case, but the fact that a congresswoman was a victim added huge momentum to the story.  It turns out that she was specifically targeted by the shooter, but that wasn’t known at the time that the incident made national headlines.  Targeting a public official, of course, raises bigger issues about political violence, the integrity of our democratic institutions, etc.  (It also enables people to politicize the shooting, although many such people apparently didn’t need any facts about the shooter’s intent to proceed down that path.)

In all the hand wringing about violence to public officials, no one seems to be questioning the role of the press in making such incidents more likely (least of all the press).  A free society does not constrain the press even if massive press attention to the shooting of a member of congress might, in fact, creating more such shootings or attempts.  A truly free press can even, if indirectly plant the idea in the head of some deranged person looking for instant fame by publishing this:

“I hate to put this in the newspaper, but we don’t have any security,” [Congressman] Sherman said.

I think it likely that publishing such an ironic comment, combined with the over-the-top coverage given to the shooting of a congresswoman, creates a greater security risk for congress members, and ultimately contributes to the larger problems that this coverage highlights.  Is freedom of the press worth such a risk?  I happen to think so.  Given the lack of attention this issue has gotten in the media, the media clearly thinks so, and probably so does most everyone else.  I just wonder how people decide which freedoms are worth a risk of violence, institutional integrity, etc., and which are not.

Did animal rights groups condemn horses to suffering?

Posted by Marc Hodak on January 5, 2011 under Unintended consequences | Be the First to Comment

Apparently so:

Though horse lovers cheered when the last slaughterhouses were shuttered, some now say they may not have thought through the consequences.

The slaughterhouses disposed of the thousands of horses abandoned or relinquished each year by owners who find them too old or temperamental to be useful or who simply can no longer afford to care for them. Now, many of those horses are sold for $10 or $20 at low-end auctions and packed on crowded transports to be slaughtered in Mexico. Animal-welfare experts say the horses often suffer greatly on the journey.

In 2006, just 11,080 U.S. horses were shipped to Mexico for slaughter. In 2008, after the American industry shut down, that number jumped to 57,017, according to the U.S. Department of Agriculture.

So, the net effect of this slaughter ban was to transport the horses, and the profit from selling their meat, south of the border.  The ban was put into place in large part because of apparent mistreatment of some horses on their way to slaughter.  I doubt the mistreatment applied to 46,000 horses, or was equivalent to spending several days starving on a hot train to Mexico.

“Every day, I’m turning horses away. I feel like I’m playing God, because I have to pick and choose,” said Whitney Wright, director of Hope for Horses, a rescue group in Asheville, N.C. She worked to shut down slaughterhouses but now would like to see a few reopen under strict guidelines for humane handling.

If you think killing is tricky business, try bringing something back from the dead.

Congress pushes the poor into the arms of loansharks

Posted by Marc Hodak on January 3, 2011 under Unintended consequences | Be the First to Comment

Todd Zywicki scores a great example of how the one law that will always accompany Congressional action is the law of unintended consequences.  In this case, the Dodd-Frank restrictions on bank intended to help poorer users of credit resulted in:

As the chief financial officer of a national payday-lending chain, Advance America, put it: “We believe that we’re starting to see a benefit of a general reduction in consumer credit, particularly . . . subprime credit cards.”

Which is happening because:

In his letter to shareholders last spring, Jamie Dimon of J.P. Morgan Chase reported that, “In the future, we no longer will be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client’s risk profile changes.”

Which is happening because the liberals in Congress care so much about the welfare of poorer users of credit that they figured they could compel the banks to provide it cheaper with a mere show of hands, as if the market for credit acted as arbitrarily as non-market institutions–like Congress.

By the way, unintended consequences doesn’t mean unforeseen consequences.  And if the consequences could be foreseen, but Congressmen disregard them anyway, could they really be called unintended?

Irony in credit land

Posted by Marc Hodak on December 16, 2010 under Unintended consequences | Be the First to Comment

For the second time in a month, I received the following note from Dun & Bradstreet:

Dear Hodak Value Advisors:

We are contacting you regarding a change in your D&B business credit file. Our records indicate your suppliers and vendors have reported a change in the way your company pays its bills.

Please call 1-866-487-xxxx immediately to learn more about the information in your business credit profile.

The note then proceeds to tell me about the benefits of a credit monitoring program they are selling.

Hodak Value Advisors has very modest credit needs.  We know exactly who our creditors are, and our relationship with every one of them is stronger than ever, reflecting our perfect record on bill paying.  So, it’s plain to me that this message is bunk.

It’s worse than bunk.  My assistant was concerned enough when she got this that she had to spend about five minutes checking up on whether there was anything for us to be worried about before being reassured that there was nothing to it.  I want D&B to pay me back for that wasted time.  The irony is that this note was signed


Dun & Bradstreet Credibility Corp.

This note, of course, has blown their credibility with me.

This Years Rich List

Posted by Marc Hodak on November 15, 2010 under Executive compensation, Reporting on pay, Unintended consequences | Be the First to Comment

Greg Maffei comes out on top of the sweepstakes he unwittingly entered with a reported $87 million in “Total Direct Compensation.”  And the corporate governance critics will be ticked off if any of that consists of company-paid security for him or his now-targeted family.

Ever since regulators decided that public display of how much certain people make was a good idea, we’ve been getting “Best Paid” lists.  The SEC has gone through conniptions to get the display right, but we are still cursed by the muddle reporting that arises out of muddled thinking and the muddled board reaction to it.

The WSJ tries to guide the wonks in a “How to Read a Proxy” sidebar highlighting the “Summary Compensation Table” (SCT), from which the WSJ rankings are basically derived.  As the WSJ helpfully points out with regards to two of the seven columns in that expensive proxy real estate:

[The term “bonus”] doesn’t include everything normally considered a bonus.  Also look under “non-equity incentive plan compensation.”

Why is this so complex?  Because before looking at a bunch numbers, it helps to know what you’re really looking for.

Read more of this article »

Could one supersize fit all?

Posted by Marc Hodak on September 30, 2010 under Unintended consequences | Be the First to Comment

McDonald’s wrote the government complaining that the loss ratio guidelines mandated by ObamaCare were uneconomical for their “mini-med” plan, and would force them to drop the plan altogether, which would leave about 30,000 of their hourly employees without health care coverage.

Last week, a senior McDonald’s official informed the Department of Health and Human Services that the restaurant chain’s insurer won’t meet a 2011 requirement to spend at least 80% to 85% of its premium revenue on medical care.

McDonald’s and trade groups say the percentage, called a medical loss ratio, is unrealistic for mini-med plans because of high administrative costs owing to frequent worker turnover, combined with relatively low spending on claims.

Democrats who drafted the health law wanted the requirement to prevent insurers from spending too much on executive salaries, marketing and other costs that they said don’t directly help patients.

McDonald’s move is the latest indication of possible unintended consequences from the health overhaul.

Unintended, perhaps, but not unforeseeable.  The lawmakers were warned that not all policies could economically support an 80% to 85% loss ratio.  But when the term “economically” comes up, congresspersons eyes glaze over, and they simply move on because they can.  “Let the little people worry about the ‘economic’ stuff.  We have financially illiterate voters to cater to, and an innumerate MSM through which to reach them.”

I used to think that Congress truly didn’t intend for “unintended consequences” to occur.  I have long since realized that they either don’t care about those consequences, or they fully intend for them to occur because it will give them a political advantage.  They can create economically unsustainable mandates for insurance carriers, then blame the insurance companies for dropping those lines so their CEO can make a few more bucks.  And the press generally let them get away with that, if not encourages it, because greed is a much easier and better story than economic incompetence.  The average reader doesn’t have to be educated on what greed is.