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