One of the biggest problems with crony capitalism is that it always ends up twisting the market to suit the interests of the biggest players while harming the smaller ones.
The fundamental reason is the cost of complying with government rules is a smaller portion of the revenues for the bigger companies, making it easier for them to absorb the hit.
Imagine two, well-run companies running the same profit margin of, say, 10%. One is a large firm with revenue of $1 billion, while the other is a small business with revenue of $1 million.
The larger business’s profit is $100 million, so paying lawyers $50,000 to handle something is basically a rounding error. For the smaller business, $50,000 is half its annual profit, a devastating blow.
For every new law, regulation, guidance, and a threatening letter the federal government issues, an angel might not die, but a small business certainly does. And that’s not even accounting for the businesses that might have gotten off the ground if the cost of keeping up with all the red tape were lower.
So it’s not surprising – just frustrating and angering – to hear that since the enactment of Dodd-Frank in 2010, 20% of the credit unions in this country have been wiped out.
Unlike commercial banks, credit unions are mostly small, non-profit institutions that provide the checking accounts, loans and other services you think of as the core functions of a commercial bank.
Half of credit unions have assets under $25 million, making them tiny players compared to the commercial banks whose average assets are 92 times that size ($2.3 billion).
Their small size is exactly what makes them vulnerable to a big, complicated new law like Dodd-Frank. (For perspective: A top law firm estimated in 2013 that the regulations to implement the law could fill 28 copies of Tolstoy’s “War and Peace.”)
“Credit unions continue to suffer under an enormous regulatory burden that was borne out of a crisis they didn’t create,” Dan Berger, the president of a group representing credit unions, said recently.
The law’s harm has spread far beyond just credit unions, however, also impacting smaller community banks in part because it includes price controls on credit card transactions that were completely unrelated to the financial crisis.
In one of the more shameful moments in lobbying history, the retail industry, led by giant “big box” stores like Walmart and Best Buy, seized on the Dodd-Frank law to enact strict limits on how much banks could charge to process the credit card payments occurring in their stores.
Sen. Dick Durbin (D-Ill.), hailing from America’s most politically corrupt state, was the big box stores’ champion, working night and day to secure the price controls.
Since its enactment, the Durbin amendment has resulted in a transfer of wealth of $36 billion from the people who process the payments to the stores that rely on the service.
During its consideration, the “argument” for this idea (and, let’s be honest, this was really just armed robbery by government) was that the stores would “pass on” the savings to customers in the form of lower prices.
For those of us retaining a Pollyanna-like optimism that retailers might actually have done that, several academics conducted a comprehensive study on the matter. Their verdict? Virtually no savings were “passed on,” to customers, stores just pocketed the extra money.
“Government price controls on debit card interchange fees were supposed to lower prices for customers. But the evidence increasingly shows that retail customers are seeing no monetary benefit of price controls while losing payment options at the point of sale,” Camden Fine, the CEO of the Independent Community Bankers of America wrote in a recent op-ed.
The worst part about this is, the credit unions and the small, community banks relatively blameless in regard to the 2008 financial crisis.
These were the people still acting responsibly in 2006 and 2007. They suffered when the big guys caused the global financial system to nearly melt down. Then, when Congress responded with a “reform” bill, large corporations from a completely different industry, on a completely unrelated issue, used the legislation to cut them a raw deal. And now they have to pay lawyers to comply with 28 volumes of “War and Peace” worth of new rules designed to solve a problem they didn’t cause.
Enough is enough. Congress needs to stop making it easier for the big companies to crush small businesses, starting with repealing the outrageous price controls in Dodd-Frank that are killing small banks.