Whether it’s Goldman Sachs and J.P. Morgan talking to their high-net worth prospects, or Edward Jones and Charles Schwab talking to traditional retail customers, there’s a constant theme in the presentations to both: it’s expensive to not be invested. If you miss the ten best market days of any stretch of time, the latter shows up in your returns in glaring fashion.
Which is a reminder of a truth routinely glossed over by economists and market pundits: capital is never costless, and it’s never costless precisely because the cost of not being invested is so very high. See the opening paragraph if you’re confused. If that’s not enough, just Google “Albert Einstein” and “compounding.” Even if his alleged assertion about compounding as the world’s eight wonder is apocryphal, it’s true nonetheless. When your money isn’t working for you, you’re falling behind.
This is something to think about as the ever-in-search-of-a-purpose Consumer Financial Protection Bureau (CFPB) seeks to solve the previous problem by causing problems for banks. The CFPB announced last week a plan to foist on banks a new rule that would limit the fees charged to customers when they spend more money than they presently have in their accounts.
For now, banks provide overdraft protection whereby they cover any overages for their customers. Naturally customers are charged for such a privilege. The CFPB thinks banks are overcharging for overdraft protection, which explains the price control that the CFPB aims to impose on banks. According to press accounts, the rule would cap overdraft fees at $5, or “set their fees at another amount that covers their costs and losses” associated with providing the service.
Except that businesses have owners, shareholders or both, and they’re in the business of providing those owners and shareholders with a return. The imposition of price controls is more often than not the imposition of a loss that businesses (including banks) aren’t in the position to sustain, thus the cessation of the service price-controlled by federal bureaucrats. Assuming a $5 cap on overdraft fees, it’s no reach to suggest that the service will no longer be offered to banking customers.
To which some will respond that what the CFPB is doing isn’t so bad. As this opinion piece notes, the CFPB is bruiting an alternative to the $5 cap rule whereby banks can “set their fees at another amount that covers their costs and losses.” Rest assured the CFPB’s alternative is similarly harmful, and in some ways is more insulting than the cap.
To see why, readers need only return to the opening paragraphs of this piece. Capital is rather expensive precisely because the cost of capital not being put to work in pursuit of a return puts the owner of same in the position of falling behind. Which is what the CFPB is asking banks to do: provide an essential service that they neither make nor lose money on. Translated, the CFPB is asking banks to parcel out capital in costless fashion.
Which is just a comment that the proposed CFPB rule isn’t just wrongheaded, it’s also insulting to banks and to reason itself. Banks have a right to make money as do their owners. The CFPB is asking all concerned to lose money as a way of giving heft to the bureaucracy’s faux compassion. No thanks.
