Tuesday, June 14, 2011

Banking industry to take new rule to court

When I was educated, I was taught that the job of courts was to implement the law, and not question it. Now it was always clear that sometimes "interpretation" of the law has in practice occasionally meant "interpreting it out of existence" or "interpreting the law to mean something quite different". But this has been rare or at least infrequent till now.

Now it looks as if, in the US, banks are going to be asked to decide whether a law sets market rates that are "too low". So the most important thing to see is: whether courts will accept this invitation to increase their own power yet more (the question of what actual limits they set is secondary).

But let me give you the background: the financial services industry has been opposed, as you might expect, to the Federal Reserve's proposed limit on debit card transaction fees. Having thrown everything in their power at the Fed and lost the argument with the expert authorities (as it appears), the banks are now waiting only for the issuance of the actual wording of the rule before they take the matter to the courts (which have of course much less expertise on financial and economic matters).

The argument is best summerd up as follows: The government should not set the price for the use of debit cards as "most prices in our economy are set by the market and that arrangement works pretty well" (in the words of a recent editorial in Bloomberg).

Bloomberg seems to have forgotten that it was the removal of too many rules that led market forces into the 2007 global crisis from which we have not yet escaped.

Just as "good fences make good neighbours", so "good rules make good markets".

In the guise of arguing that a specific rule is not good, industries really want once again to argue that we need no rules at all.

You might have thought that the crisis had taught us all some basic lessons about markets and rules. But of course industry lobbyists and CEOs are paid to try to bend rules in their favour.

You can make far more money by bending a rule in your favour, than you can by playing according to rules that are fair for card issuers as well as for card users. Sphere: Related Content

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