Opinion

Felix Salmon

Why the Fed needs to replace bark with bite

Felix Salmon
Jun 30, 2011 20:22 UTC

Antony Currie has a response today to those who say that the Fed’s U-turn on swipe fees “makes it look as if it can be cowed by the kind of intense lobbying the banks unleashed.” (Yes, that would be me.)

Antony reckons that the final figure of 21 cents “is actually a decent compromise,” and that “the Fed made the right call” — but it’s not entirely obvious why he thinks that. He says that the lower 12-cent figure was opposed by banks (duh) and “other senior banking authorities”; this is true, but it’s not in and of itself a reason to backpedal.

Banking regulators are interested in safety and soundness, and a multi-billion-dollar stream of risk-free income, in the form of debit and credit interchange fees, undoubtedly makes banks safer and sounder. But is that is not a good reason to gouge merchants every time someone makes a purchase using a debit card. And as Antony points out, banks somehow seem to survive elsewhere with much lower interchange fees: America’s are by far the highest in the world.

The farce that is “signature debit” is a big reason why, as Antony writes:

Though it rethought the fees, the Fed still missed an opportunity. U.S. debit fees are higher than elsewhere because Americans still sign for almost two-thirds of transactions — and banks keep pushing signature debit despite its being more susceptible to fraud. Browbeating banks to use PIN codes more would be safer and cheaper for all.

Behind this is the bizarre logic of US banks. First they encourage consumers to sign for debit purchases despite the fact that such purchases are much less secure; then they argue that they need high interchange fees because they have high fraud costs. This is financial chutzpah incarnate: the equivalent of the man who kills both his parents and then pleads for clemency on the grounds that he’s an orphan.

The Fed is well aware of how hollow this argument is. And it can persuade banks to move to PIN purchases in one of two ways: either by “browbeating,” as Antony would have it, or by simply making the finances of interchange uneconomical for signature debit. The second is what the Fed proposed in December, and it was powerful. The missed opportunity here was precisely to keep debit interchange at 12 cents. Now, the Fed can attempt the browbeating route, but it’s not clear what kind of browbeating Antony has in mind, and it’s even less clear that any such “moral suasion” would actually do any good.

Antony sees a pattern in the Fed’s behavior: start off extreme, and then compromise on something more reasonable.

The Fed made the right call. The trouble is it started with such an extreme stance. By digging in so early, it jeopardized the Fed’s important task of building a reputation as a regulator with a stiff resolve. Similarly, markets moved earlier this month when Fed governor Daniel Tarullo suggested banks should hold capital reserves of up to 14 percent — only to see international standards come in capped at around 10 percent.

Personally, I disagree that 12-cent interchange (which would be entirely unremarkable elsewhere in the world) is “extreme.” I also think that there’s a strong case to be made for forcing too-big-to-fail banks to hold so much capital that they have a real incentive to shrink.

But Antony is absolutely right about the pattern, and the message it sends: that the Fed is open to negotiation and compromise, and that as a result lobbying it aggressively and continuously is a no-brainer for the banks.

So let’s hope this is the end of the Fed going wobbly whenever Jamie Dimon starts having a temper tantrum. The Fed needs to show a lot more testicular fortitude going forwards, and, as Antony writes, “needs to be careful to be seen as a watchdog and not a lapdog”.

The problem is that the Fed has never been seen as a watchdog with teeth — Dimon is a director of the New York Fed, ferchrissakes. He’s literally governing his own regulator. And every time the Fed retreats from an initial position, it only looks weaker. Which is bad for the Fed, bad for America, and even, ultimately, bad for the banks being regulated. The Fed’s good at talking tough. Its job now is to actually be tough. Which is much harder.

COMMENT

Why does felix keep harping on disproven myths, sure pin debit is more secure than signature debit but they refer to two different technologies and limitations.

Felix keeps ignoring this, in the 1980s you an atm card with a pin and credit cards did not a pin because historically they used to use manual imprinting or offline transactions, the magnetic stripe then connects online transactions to approve or disapprove the card rather than calling the bank manually for the transaction or accepting.

Atm cards were used to get cash, since money is taken out of the account right away, a pin is there so if someone steals the card they can’t use it, smart right,
but credit cards never got it and they work differently.

Can you use your debit card at most online retailers no,
pin debit you cannot use, so why do most intelligent retailers assume that yeah lets use pin debit on amazon,buy.com,etc they are working on it but let me explain, a pin debit transaction is online debit- funds are taken out of the account via ach transfer, offline debit also known as signature debit or signatureless these days via contactless or if your purchase is under $25 just means that instead of taking money out of your bank account it goes through a third party network first.

With credit cards, authorization is placed to check your credit limit, much like you order something online or go to a gas station or book a flight/hotel, then you are charged, however there is flexibility because its a two-step process, the merchant can easily credit the account back,etc

With online debit, its just funds taken out and you have to use a pin each time, trouble is while most retailers in store have pin pad terminals, most other places do not, have you used pin debit online or at many establishments, no, most places have a visa or mastercard sign but not a nyce, star, sign.

Signature debit which is a convenient term allowed folks to use their bank account as their credit line, so folks who never took debit cards could simply process credit transactions to the consumer as debit, lawsuits where filed at retailers in which they did not like this because retailers far from being innocent love it when folks finance things with interest to block

Cash has costs too, would felix complain about a pin debit user subsidizing the costs back in the early 90s of theft, insurance, and travel time of cash? No, nowadays pin debit fees have risen to about 2/3s of 1 percent vs close to 1 percent of “signature debit”, however back in the 90s pin debit was maybe 7-8 cents of the dollar, thus pin debit users subsidized cash, the low fees meant retailers didn’t care for cash back.

Then again felix is wrong because online pin-less debit for small transactions and official transactions exist, you see the doj got involved because contact less or rather the ability to not have to sign for that small $10 worth of goods on your credit card was unfair so pin debit users could swipe the card and not use pin, its more complicated in that visa and mastercard bought over pin debit networks, ironically visa does have a no liablity policy for interlink.

Why exempt $9 billion bank and not $11 billion, at all, if interchange fees are a huge deal and not political windfall why exempt smaller banks, its because they don’t need the money? Who is the bark vs. small banks?

What if banks cut the amount you can spend with debit?
Would mobile payments invest if durin regulates no matter how innovated the technology is and the need for mass adoption quickly and painlessly?

As far as public utilities are concerned this is different in that there are multiple was to choose, the government has the check system where ironically if you pay your utility bill with a credit card charged extra.

In fact the government has an unfair advantage in which although checks cost money aka 30 cents on the dollar initial cost, it passes at face value, just as cash costs money , checks do too, in fact check guarantee services cost as much if not more than interchange, which is not the argument here. Of course the higher the check the less the cost as was the case of pin debit
but its unfair, emv also has its critics which is an attempt to replace traditional credit with pin and good luck using emv online the same way, also what is the point of a pin if you want to use amazon 1 check out or have your credit card on file for future billing?

I presume what visa and mastercard could do is the 3 or 4 digit security code the card unwritten, initially it was used to prevent counterfeit cards in which someone easily gets the credit card number and expiration date, since the number is just a verification its not needed to process or use the transaction, since it was never that way initially and for security purposes but retailers can check the code and if its unwritten on the card a thief wouldn’t use it a retailers that check and could block say a $2000 tv but not a $500 one.

In summary, I hope readers have gained insight not so much on the debate but the different technologies and how politics is defined not on it.

Posted by KrisBerg | Report as abusive

Counterparties

Felix Salmon
Jun 30, 2011 08:52 UTC

Felix TV: Talking to Justin Wolfers and Charles Kenny about the economics of happiness — Reuters

Felix TV: The one industry where power is shifting from capital to labor — Reuters

David Tepper has $99,864,731.94 in his savings account, after paying that $2.75 ATM fee — Dealbreaker

Ben Stein says owning 11 houses is “a psychological gift.” Which is maybe not the word I’d use — CT Post

COMMENT

Why would anyone have $10 million in a single savings account!? I realize this guy earns so much it doesn’t matter, but it’s not FDIC insured and he could structure it that way.

Posted by chappy8 | Report as abusive

The Fed caves in to banks, interchange edition

Felix Salmon
Jun 30, 2011 08:44 UTC

I could really do with a lot more transparency from the Fed on why exactly it’s decided to almost double the maximum permitted debit interchange fee. The bank lobby certainly had a lot to do with it — but the bank lobby always said that the Fed was simply doing what it was forced to do under the Durbin amendment to Dodd-Frank, and that therefore Dodd-Frank itself had to be changed.

When the Durbin amendment survived, however, suddenly the banks realized they had a Plan B — to lobby the Fed. And the Fed, it turns out, is even more susceptible to such lobbying efforts than Congress is. The sole dissent among the Fed governors was from Elizabeth Duke, who said that the new fee was too low.

Clearly the facts on the ground didn’t change between December, when the Fed came up with its 12-cent figure, and today. And now the Fed has proved itself susceptible to intense lobbying, you can be sure that the banks will keep their lobbyists active on all manner of rules and regulations which have to be promulgated under Dodd-Frank. Never mind what the law says, just make sure the regulators do what you want!

The optics of this are terrible — the Fed hasn’t even attempted to justify the hike, and indeed no matter how many times you read its press release, you’ll never be able to see that there was any hike at all. There’s talk only of the final fees, and no talk at all of the fact that they were raised substantially from the initial 12-cent proposal. The closest that we get is this, from Ben Bernanke:

We received input from more than 11,000 commenters on our proposed rule. We have taken the time needed to review these comments carefully; they have been very helpful to us and the final rule reflects changes suggested by commenters.

The message, here, is clear: keep on lobbying us! The more you lobby us, the more we’ll listen!

Why Bernanke’s sending that message, on the other hand, I have no idea.

COMMENT

“Why Bernanke’s sending that message, on the other hand, I have no idea.”

I think you do….

Posted by maynardGkeynes | Report as abusive

Will the world ever have open borders?

Felix Salmon
Jun 30, 2011 07:16 UTC

My favorite bit in this video comes towards the end, when I ask Charles about the wonderful tweet he sent out last Friday, after the gay marriage bill passed the New York senate.

One day we’ll see legal discrimination by *place* of birth as evil as discrim. by other features of birth –gender, orientation, color.less than a minute ago via web Favorite Retweet Reply

I wanted to know, was this just a lovely sentiment, or does Charles really think this is going to happen? The answer is the latter, and Charles gives two strong reasons why that might be the case.

One is the way that the world is getting smaller and more interconnected. Countries make hundreds of agreements with each other, they set up organizations like the UN and the EU, and in general behave much more pleasantly towards each other than they ever have in the past. And at some level that has to be because doing so is what their people want.

Charles’s second point was about mobility and immigration, and it’s a great one. Greater levels of immigration aren’t just a fantastic idea from a national-security standpoint and a fiscal standpoint, they’re also demographically necessary for an aging America which has a lot of labor-intensive needs in a service sector which can’t be outsourced. “The self-interest of people will weaken the effects of borders,” says Kenny, which is surely true. Americans don’t like immigration, but they love the low prices that immigration brings for their golf courses and swimming pools and McMansions.

There’s a long distance between appreciating the upside of immigration, on the one hand, and extolling the idea of completely open global borders, on the other, where everybody has the same right to work in the US, no matter where they were born. There’s many people who would push for the former, and almost nobody who would push for the latter. But as the economic distance between countries shrinks, the problems associated with such a policy will get smaller. And Charles points out too that there will be increasing numbers of Americans who want to live abroad; those Americans would in principle be quite happy to sign bilateral open-border agreements with the countries they’d like to live in.

None of this is going to happen in our lifetimes, but if you look at how far the world came over the course of the last century, there’s reason for optimism about how much more progress it can make in this one. Countries already go to war with each other much less frequently than they did in the past; the insane cost of war alone is one good reason why that might be. And without wars to make us hate each other, we’ll surely continue to get friendlier towards each other.

Sometimes, too, change can happen astonishingly fast. David Schlesinger touched on this in his chat with me yesterday — look at the way in which the Chinese government is successfully serving the interests of the Chinese people today, compared with 20 or 30 years ago.

The main official obstacle to Chinese people traveling around the US today is not China’s government, it’s America’s. And while we fear China in many ways, the spectre of mass Chinese immigration to the US is not one of them — to a large degree, America could and should welcome an influx of Chinese entrepreneurialism, which could quite possibly be funded with some of China’s trillions in foreign exchange reserves. From a US perspective, much better all that investment and job creation happen here than in China.

They put something in the water, here in Aspen, which makes people very optimistic. (Although maybe it’s inactive early in the morning: both Steve Adler and I were unimpressed by the latest demographic analysis purporting to find a centrist, consensus-driven majority in America.) But the world really is getting better, and has been for a couple of centuries now, and it’s very likely to continue doing so, in its lumpy and unpredictable way. Which means that, sooner or later, there’s a good chance that Charles’s dream will come true.

COMMENT

The concept of open boarders is stupid. It embraces the idea that you and your 5 brothers and 3 sisters can royally screw up the place you were born, see the impact of your culture / communities lousy decisions and then bolt for greener pastures where the locals plan smarter and work harder.

Good fences make good neighbors.

Posted by y2kurtus | Report as abusive

Felix TV: Is blogging dead?

Felix Salmon
Jun 29, 2011 16:52 UTC

I’ve felt for a while now that the kind of blogging I do — one person writing a series of blog posts in reverse-chronological order — is dying, even if it’s not quite dead. There are still lots of great blogs out there, but my Portfolio.com guide to the econoblogosphere, now almost four years old, is not nearly as out of date as it should be, and very few new voices have emerged since then.

One of the foremost exceptions to that rule is Alexis Madrigal at the Atlantic, so I asked him how he managed to break out as a name-brand blogger in a world where most big blogs are now written by pretty substantial teams. His home at the Atlantic is clearly part of it, as is the fact that he’s incredibly talented. But even he agreed that old-fashioned single-person blogs are largely a thing of the past, with the exception of enthusiastic practitioners in the fields they write about, be it banking or science or anything else. And those people normally blog independently, rather than as part of an old- or new-media company.

This is not necessarily a bad thing. There’s convergence going on — news organizations are becoming bloggier, and blogs are becoming newsier — and that process works to the benefit of both, even as it makes the status of “blogger” less interesting or meaningful. And as Alexis says, blogging is a lot of work, and it’s hard to sustain that level of intensity over the course of a career.

And the most interesting new development in the blogging space is Tumblr, which makes publishing much easier than Moveable Type or WordPress, and as a result is putting up some truly astonishing figures: 355 million unique visitors per month, and 400 million pageviews per day. I’d guess that’s substantially more than the entire blogosphere could boast during any golden age — Tumblr and Twitter have truly democratized publishing and helped to eradicate the distinction between writers and readers. Which is much more important than the emergence of any number of media-published individual voices.

COMMENT

@TFF, I think the main difference is links and conversation. Bloggers respond to other things on the internet, and link to them, much more than columnists, whose pieces are much more self-contained.

Posted by FelixSalmon | Report as abusive

Counterparties

Felix Salmon
Jun 29, 2011 08:03 UTC

Whether or not you agree “Obama Has Finally Become Dick Cheney,” admin’s threat to jail James Risen is pretty troubling — Atlantic

Afghan central bank governor Abdul Qadeer Fitrat flees — BBC

Skype had a plain-English explanation of its evil options scheme all along — AllThingsD

COMMENT

AngryInCali, I agree wholeheartedly. This talks about handling employees, not to the employees. The “deciders” wish to CTA (no not the financial meaning) and are spreading their cover back to those who called them evil.

By the way this presentation is set up, it was a power point shown only to select upper management to discuss how employees would be handled. Who saw the video? Were there follow up handouts and did everyone have to sign who was given information? Was there a follow up letter sent to each employee outlining the financial aspect and how it would affect them at their level?

The power point presentation isn’t going to be enough to make them look less evil… or be more likely to win their case, but it could help their cause if those who called them evil now say “Skype had a plain-English explanation of its evil options scheme all along,” because they obviously do not care if they are evil, they only care they are perceived as evil.

Posted by hsvkitty | Report as abusive

Why Lagarde got the IMF job today

Felix Salmon
Jun 28, 2011 22:21 UTC

For me the interesting thing about Christine Lagarde becoming the new managing director of the IMF is not the news itself. I said she’d get the job as long ago as May 15, and I’ve considered her a lock since May 20. Rather, the interesting thing for me is the timing: everybody expected the announcement on Thursday, the 30th, but instead it came today, the 28th. Why push things up?

Because in the fraught negotiations with Greece, every day counts — the IMF disbursement was originally due tomorrow, the 29th, and can’t wait much longer than that before Greek debt maturities in July start piling up and forcing a default. And the headless IMF, it turns out, has not been an effective actor in those negotiations. Here’s Mohamed El-Erian, an old IMF hand:

The post of managing director is not to be taken lightly in an institution that operates like a well-disciplined army, with staff looking up to the unquestioned general for decisive leadership.

This is why the resignation of Dominique Strauss-Kahn has been so disruptive to the functioning of the IMF.

With Lagarde now moving swiftly from an international campaign to actual management of the Fund, the world’s technocrats will all be hoping that she will prove a forceful and decisive leader on the urgent subject of Greece. The Greeks have a certain amount of freedom here, since it’s pretty much unthinkable that Lagarde’s first act would not be to disburse bailout funds. But one sign of a leader is getting results even when your actions are severely constrained. Lagarde has an immediate opportunity to prove herself, and it’s absolutely in Greece’s long-term interest to make her look tough and effective. She might well put these extra two days to very good use.

COMMENT

Not really true: June 30 was the end-deadline set from the beginning by the board, but the announcement has been expected on June 28 for at least a week. And CL won’t be in the chair until Tuesday next week, so it’s not as if two days this week made much difference.

Posted by IMFSDR | Report as abusive

Remixing education

Felix Salmon
Jun 28, 2011 18:00 UTC

I went to a fantastic education panel this morning called Game Changers, with three inspirational educators: John Hunter, Salman Khan, and Katie Salen. Sal Khan needs little introduction, at this point; if you haven’t seen his TED talk, go watch it now. The other two were new to me, however: John Hunter invented the World Peace Game to teach his 10-year-olds; it’s a lot more chaotic and inspirational than it sounds. And Katie Salen is the executive director of the Institute of Play, which has already built one school in New York, and has another on the way in Chicago.

What all of these people have in common is an emphasis on teachers ceding control of the classroom and their curriculum. In its place, more than anything else, is gameplay. The Khan Academy gameplay is highly structured; the World Peace Game is more fluid; and the Quest to Learn games are in many cases designed by the students themselves. But in all cases the students are learning from each other, and indeed the teachers are dynamically learning from the students too. This is not surprising when you find 5th graders in Los Altos diving gleefully into Khan Academy’s calculus modules and becoming expert in undergraduate-level mathematics; and indeed another thing these teachers have in common is that they’re all fans of mixing up ages and abilities in classrooms.

Inspirational teachers are nothing new, of course, and it’s probably true to say that an inspirational teacher is always going to do great work, whatever the tools they have to work with. But Khan made the great point that high school students, in particular, can and do make incredibly inspirational teachers themselves, if only you give them the opportunity.

All of this boils down to what Hunter called “embracing chaos”. This appears in many ways: you have to encourage kids to make mistakes; you have to let them develop their own ways of learning; and, on a more mundane but in many ways much more important level, you have to give them much more access to the internet than they generally have right now.

Salen was very strong on this last point, complaining about how internet access is very limited in most schools, and that typical filters stop kids from going to any site with the word “game” in it. I asked about one of the things which worries me most about the present generation of kids — which is that they have not developed the critical abilities necessary to distinguish reliable from unreliable information on the internet. The classic example of this is the Pacific Northwest Tree Octopus, which kids believe in when they read about it on the internet, even if they’re initially skeptical. But Hunter was reasonably convincing that simply telling 5th-graders about the tree octopus is a very powerful lesson for them about not always believing what they read. And Salen was even more convincing that if we want kids to develop critical abilities, we need to give them access to the unfettered internet rather than confining them to canonical encyclopedias and the like.

None of which necessarily lends itself to pat solutions which can be scaled easily across a state or nation’s classrooms — although it’ll be very interesting to see what happens when the Khan Academy curriculum is adopted across the whole Los Altos school district for 5th and 6th grade. But I do think that there’s reason for optimism on the education front in the long term. I’m enormously excited by (and a little bit jealous of) many of the opportunities and resources available to today’s kids, even if they’re largely outside formal classrooms. And I can’t help but feel that somehow they will show up in improved productivity and creativity down the road. The panelists here in Aspen show how such things can be formalized and implemented by visionary educators; as their ideas spread, they’ll be remixed and reinvented in ways that none of us can currently imagine, quite possibly by people under the age of 12. The possibility space, in other words, is bigger than it’s ever been. And in a random-walk kind of way, it’s bound to be filled somehow, with games and game-changers both.

COMMENT

The classrooms and the way of teaching is changing in India, especially in metros like Bangalore, Delhi, Mumbai etc. The Kindergarten kids are using iPads instead of slates. The traditional black boards are giving way to smart boards.
http://dealsdirectory.in/blog/changing-c lassrooms-and-method-of-teaching-in-indi a/

Posted by dealsIndia | Report as abusive

Counterparties

Felix Salmon
Jun 28, 2011 07:01 UTC

This private equity shop can’t possibly be evil! The founder went to Wharton twice! — Influx

“Is the nation waiting with bated breath for us to get to the Calvin Coolidge coin? No!” — NPR, see also.

Felix Investments Sues SecondMarket over a failed Facebook deal — PE Hub

Emanuel Derman, now blogging at Reuters — Reuters

RIP: “Google said it will terminate its PowerMeter service on September 16″ — Reuters

Against Google directions — wwword

COMMENT

I absolutely hate when someone gives me directions with no idea how many miles it is from one turn to the next. “Just after you pass under the railroad tracks” is great, especially if it’s only a quarter mile after the last turn, but if I go five miles before I get to the railroad tracks, I’m anxious until I see the street sign that I may have missed previous railroad tracks, or I might be about to miss ones up ahead. Especially where a turn is hidden or nondescript, the odometer is essential.

Posted by dWj | Report as abusive
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