All Laws Have Unintended Consequences

Government fixes generally make things worse.

The Obama administration praised the Dodd-Frank financial "reform" bill as absolutely necessary to protect innocent, naive consumers from greedy bankers.  Unfortunately, as with most government actions, this consumer "protection" measure is hurting prudent bank customers rather than helping them.

The Death of Free Checking

One provision of the bill reduced the penalties that banks could charge when someone lost track of how much money they had and overdrew their account.  Although the precise results of this provision aren't known yet, it appears that the rule will hurt bank customers who don't overdraw their accounts.

Banks have to make a profit somehow, and if they can't make money when people overdraw their accounts, they have to change fees for something else.  It seems that the classic middle-class privilege of having a free checking account will disappear thanks to government meddling in the banking business.  The Wall Street Journal reports:

Yet over the past few months, the middle class has seen a beneficial feature of modern banking—free checking—begin to vanish due to these "reforms" and the substantial loss of bank revenues that they've caused.

As banks have had to find money somewhere, they're imposing fees on checking accounts that used to be free - which is, of course, as perfectly legal and even economically fair as it is unwelcome.  Result?  This law isn't giving any net benefit to consumers.

Banks used to get money by charging fees to careless people and used the money to subsidize careful people.  Now that they can't do that any more, the careful people will have to pay more and there will be few if any penalties for carelessness.  Thanks, government!

The people who wrote the Dodd-Frank bill probably didn't intend to destroy free checking, but that's whats happening.  One can only hope that the voters will remember who cost them money at the next election.

Closing Embassy Bank Accounts

In the wake of 9-11, the government realized that al Qaeda and friends were using the banking system to move money to pay for acts of terrorism all over the world.  The drug gangs had been transferring vast sums of ill-gotten gains for years and law enforcement agencies had been having trouble penetrating national bank secrecy laws to find out where the money was going.

After 9-11, laws were passed making American banks increasingly responsible for ensuring that their customers were not engaging in terrorism or other illegal activities.  Banks have had to spend a great deal of money developing systems to try to make sure that their customers are on the up and up.  They pass these costs on to their customers, of course.

As the laws have been tightened, banks have had to turn away more and more potential customers, just as one would expect.  The Washington Post reports:

The State Department has confirmed that it is engaged in an intensive effort to assist more than three dozen embassies in Washington that are facing the possible closing of their U.S. bank accounts because of a growing movement by several major banks to drop embassies from their rolls.

Without being able to open bank accounts, embassies have a hard time meeting payroll obligations and it's difficult to pay their bills.  Why are the banks walking away from the business?  Because they have no way to ensure that the embassies aren't engaging in money laundering or in supporting terrorism.

How could they?  Embassies represent sovereign nations and their property is effectively part of the country they represent.  There's simply no way that a bank can ensure that any embassy or the country it represents isn't doing something for which the American government holds banks liable - particularly if it's the embassy of Libya, Iran, or North Korea.

Yet wasn't one of President Obama's campaign promises a willingness to chat with dictators?  How does he expect to chat with them if he makes it impossible for them to pay their phone bills?

Not being able to verify that they aren't going to commit crimes under American law, the banks are closing embassies' bank accounts.

This is goofy.  How can a bank be held responsible for ensuring proper behavior by a sovereign nation?  Isn't that the job of the State Department - which it's having a very hard time doing just at the moment?  American law holds banks responsible for something they can neither investigate nor control so they're walking away from their customers.

Did our lawmakers intend to make it hard for embassies to do business in the US?  Probably not, but that's what they did.  Did our lawmakers intend to wipe out free checking?  Maybe not, but that's what they did.

Other Accidents

Most laws have unintended side-effects.  Here are a very few examples:

  • Did the lawmakers who outlawed the use of safe, well-understood incandescent bulbs intend to poison Chinese factory workers who have to work with mercury while making twisty fluorescent lights?  Maybe not, but that's what they did.
  • Did the lawmakers who allowed government agencies to write so many regulations intend to destroy so many jobs?  Maybe not, but that's what they did.  Did Robert Raines intend to push saloon keepers into the brothel business when he urged the New York legislature to outlaw drinking on Sunday?  No, but that's what happened.
  • Did the people who sponsored the law that forbade selling liquor anywhere in the United States intend to provide a business opportunity which put the Mafia in business?  No, but that's what they did.  Fortunately, Prohibition failed so spectacularly that it was actually repealed, a stellar example we should be repeating with alacrity.
  • The preservationists who set up the National Register of Historic Buildings probably didn't expect that their regulations would prevent the city of Des Moines from replacing or repairing their 150-year-old sewers, but that's how the law has been applied.  We've always said that most of Congress' laws stink, but that one really stinks.
  • Did President Nixon's associates who started our war on drugs intend to fund Mexican drug dealers who now have the firepower to challenge the Mexican government?  That's how their plans worked out.
  • The lawmakers that restricted banks' ability to raise credit card interest rates to match risk didn't intend to make it harder for people to get credit, but the NT Times says that's what happened: "To compensate for its inability to quickly raise rates, Chase has decided to lessen its exposure by no longer offering cards to a portion of its customers that it deems the riskiest."
  • Did the people who demanded that the CIA stop torturing captives realize that if they couldn't get any information, there was no point in capturing anybody?  Did they anticipate that if there's nothing to be learned, our guys might as well not put themselves at risk and kill suspects with drones instead?  That's what is going on even as you read this.
  • Did the California lawmakers who passed a law saying that lawyers who work on loan modifications can't receive money until the work is done want to make it impossible for people to hire lawyers?  That's what happened.
  • Did the bureaucrats at the FDA who regulate medical research intend to drive cancer research to China?  They probably didn't even think about it, but that's what's happening.

The lawmaker's intention doesn't matter; what counts is how the law works out in the real world.  Whether these results are because the laws are written poorly or whether it's because they're trying to regulate processes that are too complicated for government employees to handle makes no difference: the end result is destroying our economy, our power, and our way of life.

Our government needs to be trimmed back.  The incoming Republican Congress has promised to propose one program per week to cut; let's give them a hand in this urgently important yet incomprehensibly massive task!  Please use the comment space below to give us your favorite example of an unintended consequence of a government law or policy so we can draw silly laws to their attention.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Bureaucracy.
Reader Comments

A whitewashing article:

This needs repeal as much as Obamacare.

January 4, 2011 9:53 AM

Remove the mercury from everything, especially including vaccines. Why not remove the mandatory vaccines altogether?

January 4, 2011 1:18 PM

Also, remove fluoride from EVERYTHING. Why is this shit being put in everything? Get rid of it!!!!!

January 4, 2011 1:21 PM

Wife was just down at the local farmer's market. Guess that will become illegal under the regulations issued under the authority of this bill. As my pappy used to say: "give them and inch and they will take a mile."

January 4, 2011 5:52 PM

The Wall Street Journal reports that people are being pushed out of the banking system into the hands of loan sharks:

The least surprising event of 2010 was that, in the wake of new federal limits on how credit-card issuers can price risk and adjust interest rates, more Americans had to go to payday lenders, pawn shops and local loan sharks in order to get credit. It's simply the latest installment in the old story of regulators thinking they can wish away the unintended consequences of consumer credit regulation.

Proponents of the 2009 Credit CARD (Card Accountability Responsibility and Disclosure) Act argued that it would protect Americans from exploitative credit-card companies by limiting penalty fees and interest-rate adjustments. For many Americans, though, the law meant higher interest rates, an increase in other fees, and reduced credit limits.

The impact was even worse for lower-income Americans, who have lost access to credit cards and were dumped in the laps of payday lenders that charge interest rates 10 times higher than credit-card companies. 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."

Regulators cannot wish away the need of low-income consumers for credit: If your car's transmission blows, you need $2,000 for repairs to get to work, whether or not you have it saved in the bank (and most low-income Americans don't). If you can't get a credit card, you're going to have to get that money from a payday lender, pawn shop or loan shark.

In a competitive market, regulation of consumer credit has three predictable types of unintended consequences. First, regulation of some terms of the credit contract will result in the repricing of other terms. Thus restrictions on the ability to raise interest rates in response to a change in a borrower's risk profile lead card issuers to raise interest rates on all cardholders, good and bad risks alike.

But even if card issuers reprice some terms, they may still be unable to price risk efficiently under the new rules. This gives rise to a second type of unintended consequence: product substitution. Card issuers can't price risk, so they issue fewer cards—pushing would-be customers to payday lenders and other nontraditional credit products.

Third, if issuers can't price risk effectively, they will ration lending. In order to make a loan, a lender must be able to price its risk efficiently or to reduce risk exposure by rationing credit. One way to do the latter is to lend less to existing borrowers, which is part of the reason why more than $1 trillion in credit-card lines have been slashed since the onset of the credit crunch.

Banks can also drop riskier borrowers completely. 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." Meet the new payday loan customers.

And how will the market respond to the so-called Durbin Amendment to the Dodd-Frank banking reform law, which places price controls on debit-card interchange fees (which retailers pay for accepting cards)?


Congress can pass all the laws it wants, but it can't repeal the law of supply and demand and the law of unintended consequences.

January 4, 2011 7:07 PM

A more modern & classic example is the Bush statists who attacked the American people with the Patriot act, to say nothing of domestic spying, Homeland Security & the beloved TSA..
Leave it to Republicans to claim your freedom thru their security

January 4, 2011 8:27 PM

irvnx: Please never ever ever forget that CONGRESS makes the laws. The President signs them. While it may be better for the president to not sign a law, congress is responsible for the law.

A president presents a budget, but CONGRESS, particularly the House, authorizes the expenditures.

We far to often lay the blame at the feet of the president, and as the head of the party, that's sort of fair. But congress deserves most of the blame.

January 5, 2011 9:48 AM

fun fact: the majority of the Patriot Act was written by Joe Biden

January 11, 2011 8:14 AM
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