Bank of America, Adam Smith and a Fee Market System


In keeping with the new Durbin-inspired trend of candor and brevity, B of A CEO Brian Moynihan justified the new fee by saying, "we have the right to make a profit." (Translation—I think they need the dough). B of A and the other big banks may well lose billions of dollars in revenue as a result of populist rage against institutional greed and corruption—as manifested by certain provisions of the abovementioned pieces of legislation that aimed to achieve greater accountability, certainty, transparency and fairness in the financial services sector.

This includes the Durbin amendment—which, according to its author, was aimed at curbing the banks "excessive" profits relating to swipe fees. No doubt the number crunchers at B of A determined that instituting the fee will make them more money than they might lose from disgruntled customers who follow Durbin's advice and "get the heck out of that bank."

According to Bob Hammer, CEO of R. K. Hammer, a card industry advisory firm, B of A's new debit card fee will generate an estimated $1 billion, "About half of what Durbin will cost them."

Oddly enough, shortly after the announcement of the imposition of its new fee, B of A's website mysteriously seemed to have a great number of problems and was actually nonfunctional for a number of days. The bank claims it was the result of site maintenance and heavy traffic. What say you?

When you think about it, Durbin and Moynihan are actually referring to the principles established more than three centuries ago by Adam Smith in his pioneering work "The Wealth of Nations." In a democracy, capitalism has a few very simple rules, chief among them being that businesses can set prices and fees however they may like, and consumers can choose to go somewhere else if they don't like them. Isn't this what a free society and a competitive economy are all about? Nobody can tell the bank what to charge, and no one can force the consumer to pay it. There are lots of customers and lots of banks to choose from.

Unfortunately, not everybody remembered Adam Smith. On one of the Sunday talk shows, President Obama, responding to a question about what can be done about those fees, said "This is exactly why we need this Consumer Financial Protection Bureau that we set up that is ready to go," Obama said. "This is exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening."


Unwittingly (and, as always, with good intentions) the President set back the cause of the CFPB dramatically (though he has since done some backpedaling). No one on either side of the aisle really wants an agency that can simply dictate fees. Later in the same interview the president also talked about such fees being administered "fairly and transparently." He's dead right on that one. It is within the government's bailiwick to make sure that consumers are well informed, that disclosure of fees and risks is robust, and that unfair or deceptive practices are banned. But in a free society, the authority of any government should end right there.

[Related Article: Obama Blasts BofA's New $5 Fee]

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