Barney Frank Criticizes the Durbin Amendment

I missed this quote from Barney Frank last week in response to BoA’s customers being Durbinized with new bank fees:

The Massachusetts Democrat, who co-sponsored the Dodd-Frank financial reform bill, said he still supports opposing a decision by congressional lawmakers to include the fee crackdown in the legislation.

“The banks will charge you more, and I don’t think the retailers are going to charge you less, which is why I didn’t want to put it in the first place,” Mr. Frank explained.

Some of the savings to retailers, of course, will be passed through to consumers (I assume Frank wasn’t suggesting there’d be no pass-through at all by retailers).  The real question is how much and how quickly the savings will be passed through by retailers versus the incidence and speed of pass-through in higher fees to bank customers (the question is one of incidence analysis). Based on available theory and empirical evidence it seems almost certain that the pass-through to bank customers in higher prices and lower quality will be larger and certainly faster (we already know the second part) than any potential savings to retailers.  Home Depot, of course, said that it expected to reduce its costs $35 million per year from Durbin and made no allowance or qualification for pass-through to its customers.  This estimate appears to be a static estimate and so doesn’t count  the inevitable substitution of consumers to greater use of credit and prepaid cards, which will wipe out some of this saving, as well as any effect of increased liquidity constraints on consumers from reduced use of debit cards.

Of course, even if the pass-through were largely equal (which it probably isn’t) that leaves aside what for me is an even more important issue–perhaps in the end Home Depot’s customers will save 2 cents on a 2 x 4 but that seems like small solace to the hundreds of thousands of low-income people who will be driven out of the mainstream banking system by Durbin fees.  Not to mention the social cost of deterring the continued spread of electronic payments and increased reliance on paper-based payment systems (including all the social costs of cash).

Update: Commenters have observed that my initial post title might be subject to being misconstrued.  That honestly never crossed my mind and I certainly didn’t intend that.  I apologize and have changed the title of the post accordingly.