Kevin Drum - January 2010

More Debit Card Madness

| Mon Jan. 4, 2010 11:11 PM PST

Someday I'll finally be able to say that there's nothing left that credit/debit card companies can do that would surprise me. But today is not that day. As I read through Tuesday's front page article on the Visa debit card network in the New York Times, I found myself so gobsmacked that I wasn't even outraged. Instead, I kept laughing at the sheer audacity of the whole thing. It is truly unbelievable.

It's a little complicated to summarize the piece in a few words,1 but it turns out that there's a big difference between using a debit card that you authorize via a PIN and using a debit card that you authorize with a signature. Back in the early days of debit cards, the small networks that operated ATMs used PINs to authorize debit cards and charged merchants no fees for their use. In fact, sometimes merchants even received a small rebate because, after all, it costs banks less to process a debit card transaction than a check.

That changed after Visa entered the debit market. In the 1990s, Visa promoted a debit card that let consumers access their checking account on the same network that processed its credit cards, which required a signature.

To persuade the banks to issue more of its debit cards, Visa charged merchants for these transactions and passed the money to the issuing banks. By 1999, Visa was setting fees of $1.35 on a $100 purchase, while Maestro and other regional PIN networks charged less than a dime, Federal Reserve data shows. Visa says the fee was justified because signature debit was so much more useful than PIN debit; at the time, roughly 15 percent of merchants had keypads for entering a PIN.

Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.

Visa's explanation for its high fees is pretty fanciful, but whatever. Everyone has keypads now, and a lawsuit eventually put an end to Visa's "accept all cards" policy. What's more, Visa's transaction volume has gone way up, and electronic payment networks boast the ultimate in economies of scale. So not only is Visa now charging a dime per transaction like the other guys, they're probably only charging a few pennies. Right?

While some merchants said they thought the lawsuit would pave the way to a new era of competition, a curious thing happened instead: while Visa temporarily lowered its fees for signature debit, it raised the price on PIN debit transactions and passed the funds on to card-issuing banks, and its competitors soon followed.

The current class-action lawsuit joined by Mr. Goldstone contends that Visa’s PIN debit network, called Interlink, is offering banks higher fees as an incentive to issue debit cards that are exclusively routed over this network. Interlink, which has raised its PIN debit fees for small merchants to 90 cents for each $100 transaction, from 20 cents in 2002, is often the most expensive, especially for small merchants, Fed data shows.

One large retailer, who requested anonymity to preserve its relationship with Visa, provided data that showed Interlink’s share of PIN purchases rose to 47 percent in 2009, from 20 percent in 2002, even as its fees steadily increased ahead of most other networks — to 49 cents per $100 transaction in 2009, from 38 cents in 2006.

And what is Visa's excuse for its astronomical fees?  They are, says Elizabeth Buse, Visa’s global head of product, “not a cost-based calculation, but a value-based calculation.” Roger that.

1In other words, you should click the link and read the whole thing. Really.

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Quote of the Day: Modern Economics

| Mon Jan. 4, 2010 7:48 PM PST

From Daniel Davies, on the purpose of the economics profession:

The production of more or less mendacious intellectual smokescreens for policies which favour the interests of rich and powerful men isn’t a sort of industrial pollution from the modern economics profession — it’s the product.

Yeah, pretty much. With a few honorable exceptions, of course.

Chart of the Day: Housing Bubbles

| Mon Jan. 4, 2010 11:48 AM PST

Ben Bernanke is famous as the originator of the theory of the "global savings glut" as a partial explanation for the previous decade's1 housing bubble, and in his speech yesterday at the American Economic Association he put up this chart to demonstrate his point. Basically, it shows that big current account deficits are moderately correlated with housing bubbles in various countries around the world. Spain, Britain, and the United States ran big deficits, which means that lots of overseas money was flowing in and helping to finance a boom. Germany and Switzerland ran big surpluses, which means that money was flowing out and housing prices stayed fairly flat.

That's only part of the story, of course, but it's always struck me as an important part. If huge amounts of cheap money are flowing into an economy, then all the rules in the world aren't going to stop it from inflating something, and housing is always a good candidate. At the same time, it's also incomplete. Ireland ran a mostly balanced current account and suffered one of the biggest housing bubbles anyway. What's more, in a sense it doesn't matter as much as it once did since this kind of contagion spreads so fast now. Germany may have run current account surpluses, but its banks bought up plenty of American mortgage securities and insured them using credit default swaps from American insurance companies, so when the bubble burst they were hurt every bit as badly as we were.

And of course, although rules can't stop hot money from inflating assets completely, they can moderate its effect. As Paul Krugman says: "Bernanke should have been more forthright about the Fed’s undoubted failures: Greenspan’s rejection of advice about the risks of subprime lending, and the failure of top officials, BB included, to recognize the housing bubble in real time." America needs to get its long-term trade deficit under control, but we also need to get a whole lot more serious about regulating leverage throughout the entire economic system in simple and transparent ways. These aren't competing goals, they're complementary ones.

1Isn't it nice to finally be able to refer to this cleanly as the "previous decade"?

Obama on Terror

| Mon Jan. 4, 2010 10:21 AM PST

Peter Baker reviews Barack Obama's anti-terror strategy in the New York Times magazine:

Perhaps the biggest change Obama has made is what one former adviser calls the “mood music” — choice of language, outreach to Muslims, rhetorical fidelity to the rule of law and a shift in tone from the all-or-nothing days of the Bush administration. He is committed to taking aggressive actions to disrupt terrorist cells, aides said, but he also considers his speech in Cairo to the Islamic world in June central to his efforts to combat terrorism. “If you asked him what are the most important things he’s done to fight terrorism in his first year, he would put Cairo in the top three,” Rahm Emanuel, his chief of staff, told me.

The policies themselves, though, have not changed nearly as much as the political battles over closing the prison at Guantánamo Bay and trying Khalid Shaikh Mohammed in New York would suggest. “The administration came in determined to undo a lot of the policies of the prior administration,” Senator Susan Collins of Maine, the top Republican on the homeland-security committee, told me, “but in fact is finding that many of those policies were better-thought-out than they realized — or that doing away with them is a far more complex task.”

....Michael Hayden, the last C.I.A. director under Bush, was willing to say publicly what others would not. “There is a continuum from the Bush administration, particularly as it changed in the second administration as circumstances changed, and the Obama administration,” Hayden told me. James Jay Carafano, a homeland-security expert at the Heritage Foundation, was blunter. “I don’t think it’s even fair to call it Bush Lite,” he said. “It’s Bush. It’s really, really hard to find a difference that’s meaningful and not atmospheric. You see a lot of straining on things trying to make things look repackaged, but they’re really not that different.”

Most former Bush officials, Baker says, aren't willing to admit this because they're afraid of retaliation from the Cheney wing of the party. But it seems largely true to me. And even though I'd prefer a little more in the way of concrete changes, those "atmospherics" are probably more important than Carafano gives them credit for, since the fight against terrorism is very largely one of moderating the conditions that allow groups like al-Qaeda to recruit and function in the first place. Technically, it might not matter whether we keep terror suspects in Guantanamo or Illinois, but if closing Gitmo deprives Osama bin Laden of a rallying point for his troops then it's worth a thousand drone attacks in the hinterlands of Afghanistan.

On another note, conservative moderates are a real bunch of cowards, aren't they? Liberal moderates sure don't have any problem pissing off the lefty wing of their party.

Is the NFL a Monopoly?

| Mon Jan. 4, 2010 9:42 AM PST

The Supreme Court is slated to hear an appeal soon from a company that lost an NFL contract:

On Jan. 13, the pro football owners will be asking the high court to rule for the first time that the NFL is shielded from antitrust laws because, while its teams compete on the playing field, they function in business as a "single entity."

....In its appeal, the NFL asked the justices to rule broadly that a pro sports league can be "deemed a single entity" and is thereby immune from the antitrust laws "with respect to core venture functions." This should include matters such as "where to locate its clubs" and "the terms and conditions of player employment," the league's lawyers said.

Obviously I'm confused about something, but if the NFL is a "single entity" — i.e., the only pro football entity in America — shouldn't that mean they're especially subject to antitrust laws, not immune from them? What am I missing here?

Ping Pong Update

| Sun Jan. 3, 2010 10:16 PM PST

Will House and Senate Democrats convene a conference committee to hash out differences between their healthcare bills? Or will the House simply vote on the Senate version and be done with it? Jon Cohn says it's going to be neither — and both:

According to a pair of senior Capitol Hill staffers, one from each chamber, House and Senate Democrats are “almost certain” to negotiate informally rather than convene a formal conference committee....“There will almost certainly be full negotiations but no formal conference,” the House staffer says. “There are too many procedural hurdles to go the formal conference route in the Senate.”

....“I think the Republicans have made our decision for us," the Senate staffer says. "It’s time for a little ping-pong.”

“Ping pong” is a reference to one way the House and Senate could proceed. With ping-ponging, the chambers send legislation back and forth to one another until they finally have an agreed-upon version of the bill. But even ping-ponging can take different forms and some people use the term generically to refer to any informal negotiations.

If this turns out to be true, then presumably one chamber or the other will pass the renegotiated bill and then send it directly to the other chamber. At least, that seems more likely to me than literally ping-ponging the bill back and forth several times.

In any case, this seems like a reasonable plan. Republicans have made it clear that they plan to erect every possible procedural hurdle they can think of, even including objections to routine things like naming conference committee members. So, since they've plainly given up on trying to influence the bill itself and are merely trying to obstruct and delay, there's really no reason why Democrats shouldn't play by the same rules and try to avoid obstruction any way they can. Congress has other things to do, after all, and spending weeks playing procedural games with Republicans keeps them from getting to it. It's time to put healthcare to bed and start spending time on climate change, financial regulation, and the 2011 budget instead. Enough's enough.

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New Year's Catblogging

| Fri Jan. 1, 2010 9:45 AM PST

You've seen catblogging in the aughts. Now prepare yourself for the awesome spectacle of catblogging in the teens!

Which, um, turns out to be much the same. But maybe it's because these pictures were taken yesterday and aren't truly new decade material. In any case, Inkblot is on the left, swatting at a stick outside the frame of the picture. Actually, it was an iron rod that I was waving around, and after Inkblot bopped it a few times and realized it didn't bend friskily like a normal stick, he got scared of its adamantine nature and eventually fled the scene. (And by "fled" I mean he jumped over to the other chaise longue and gave me the evil eye.) As for Domino, she's just enjoying the last of the December sun here in Southern California. Good call.