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Moneybeat: Limiting principles


WORLD Radio - Moneybeat: Limiting principles

Judge blocks new federal rule capping credit card late fees. Plus, defining terms: quantitative easing and tightening

A traveler uses a Delta Airlines credit card. Associated Press/Photo by Damian Dovarganes, file

JENNY ROUGH, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It's time now to talk business markets and the economy with financial analyst and advisor David Bahnson. David's head of the wealth management firm, the Bahnson group, and he is here now. David. Good morning.

DAVID BAHNSEN: Oh, good morning, Nick, good to be with you.

EICHER: Well, David, we talked about this back when it was proposed, the Consumer Financial Protection Bureau had put forward a cap on the amount of money credit card companies can charge consumers whenever they make a late payment. It would place an $8 max. on late fees with some exceptions to the rule. It was set to take effect tomorrow. But a federal judge in Texas last week issued a temporary injunction. The rule is blocked for now. He's considering a lawsuit challenging whether this CFPB reg. is within the scope of powers granted by the Constitution. Now, we don't need to go into the legal finer points. Our legal correspondents are more than capable of doing that. They will weigh in in due course. But as an economic matter, David, what is the effect of these kinds of rules?

BAHNSEN: Well, look, this should not be thought of as any different than any other price. What is the natural limit on price? It is what consumers will pay, and what competition will do. And can anyone argue with a straight face that people do not have competition with credit cards? There are thousands of banks that issue credit cards. And so to the extent that someone says this bank's late fee is $20. And every now and then I have to pay my credit card late. And there's another bank that has a fee of only $11, or whatnot. There is a natural ability to compete around late fees, just like there is around interest rates. What would be the economic limiting principle for the federal government mandating what a late fee could be, but not mandating what the interest rate could be? Or how much time? Right now everyone has to pay their credit card bill within a month. Why not have the federal government come in and say you must give three months? 

The whole entire issue is that these decisions are made by market actors. And why are market actors better prepared, better qualified, better suited to make these decisions than the bureaucrats in the Consumer Financial Protection Bureau, an unconstitutional arm, I might add, of the executive branch of government? Why? Because they have skin in the game. They actually are participating. And so transactions either benefit them or hurt them. Where for a government bureaucrat, they have no connection, either in incentive—it doesn't affect them one way or the other—or in knowledge—they don't know what the factors are, what that might make somebody take a certain card at a certain fee, you know, have decision making, why the originating banks set the terms that they do. There's knowledge and incentives that go into economic decision making. And the federal government is the least qualified entity I can imagine to have any opinion. And as you said, you can let the legal—the very capable I might add—legal scholars at The World and Everything in It frequently feature to talk about the constitutionality. But this federal judge sure seems to me to be reading the clear intent and black and white of the law. And if I were wrong about that, that the federal government could set what the fee would be for an operational term of a transaction like this, I would love to know why they couldn't set 15 Other terms as well.

EICHER: Well, David, I know you don't mean to give them any ideas.

BAHNSEN: Somehow I don't think they need the ideas from me. They are limited only by their own imaginations.

EICHER: Well, and sometimes the Constitution. We'll see how that case progresses. Let's turn to the markets. David, you made a comment in the introduction to your Dividend Cafe web posting this week that it appears the markets have turned for the better. Tell us a bit about that.

BAHNSEN: Well, I mean, we certainly had a pretty good drop in the month of April, a few percentage points. And now we've had a few percentage points reversed in the first couple weeks of May. And this is the volatility that we expected to see in the market this year, up and down movements around some of these various factors we've talked about. The will-they/won't-they of the Fed. Are earnings going to be worse than expected or better than expected? Is inflation going to be lower than expected or higher than expected? And each data point that comes out with some of these different categories can tend to have a little bit of an exaggerated effect on markets. And the only thing I want to add, Nick, is that that's all being done with markets already at a rather high valuation. And so it makes it even more, to use the phrase, “trigger happy.” 

But since the Fed came out of their last meeting, said they were not going to be raising rates anytime in the near future. But announced that they also were not cutting rates, but then did ease up on the quantitative tightening. They had been removing 60 billion a month from their balance sheet, and they lowered that target number to 25 billion. So that point, I think the market said, Okay, well, on the margin, financial market’s liquidity is getting better, not tighter. The Fed has given us a signal that they're not at any risk of reversing course there. And in the meantime, that's with a backdrop—as much as it may be a surprise for a lot of people—have pretty good fundamentals within the markets. The earnings have come in on target margin: profit margins have stayed rather significant level, profits are on track to meet their goals, not wildly exceed them. But those three things put together have kind of changed sentiment in just a couple of weeks. Can it reverse the other way, with a high CPI number, or a certain level of employment number, or a certain GDP number? You know, there's all kinds of data points that can pull it back and forth for those that are really concerned about the short term moves. But those are the gyrations that we're seeing right now.

EICHER: Right. Well, David, for defining terms, I'd like to pick up on something that you said just a few minutes ago about markets responding to the Feds easing up on quantitative tightening. So for this week, I'd like for you to define that term. And of course, take your time doing that, because I know it's complicated. We talk a lot about the will-they or won't-they of whether the Fed will reduce interest rates, and we've talked about that. But what we've not talked about is this other set of policy tools the Fed uses around quantitative tightening. That's outside the whole interest rate conversation that dominates most of the coverage. So run with that quantitative tightening.

BAHNSEN: Well, and it does have something to do with interest rates. But let's just define it and kind of pull it all in together. It's good to make our term both, because there's no point in defining quantitative tightening apart from its predecessor, which is quantitative easing. If there hasn't been quantitative easing, there's nothing to tighten. And again, the shorthand that is used throughout, you know, the jargon of the culture and the media and economists is QE for quantitative easing, and QT for quantitative tightening. So what was QE? It was a program where essentially the Federal Reserve buys bonds. It has to be government-backed securities where the Fed isn't allowed to own it. The Fed was coming in and buying those bonds from banks with money that didn't exist. The banks then ended up with more cash and the Fed ends up with the bonds on their balance sheet. But the reason why people would say, “Well, isn't it the same as just printing money?'" is that the Fed was crediting the money to the banks' excess reserves. And that money doesn't become money, it doesn't become circulation until the banks lend it out. And banks generally are not lending from excess reserves. And they certainly weren't after the financial crisis. 

I know we're getting in the weeds here, but it's really important to understand. To really make sure the banks weren't lending this money out, the Fed began paying interest on excess reserves. So now banks had an incentive to just get free money. The Fed was putting money on their excess reserves and paying them a little bit of money. And so it kept the banks from lending the money out. And this is why I say it does have to do with interest rates. Why do all of this hocus pocus? It was a way to manipulate the interest rate. And so quantitative easing in the Fed's mind worked so well they did a second round. And then they ended up doing a bazooka round with QE-3. And then finally, between 2013 and 14, after adding another couple of trillion dollars to the Fed's balance sheet, they stopped that and then we didn't do any QE until COVID. And then they did $5 trillion of it. So that's what quantitative easing is. 

And all quantitative tightening is is the opposite. Instead of the Fed buying bonds, as they mature, they're not reinvesting them, so that money just gets extinguished from the financial system. The Fed has less money on its balance sheet, and that ends up taking liquidity. It's a way of tightening monetary policy. My view is that QE was done to further stimulate when interest rates are already at zero. How do you stimulate further when you're at zero, you can't go lower than zero. So QE gave them an additional policy tool to add more liquidity to financial markets and ease monetary policy further. 

QT, on the other hand, they could always tighten more, you could always adjust raise rates higher and higher. So why do QT? My view is that it's because they want to do QE again.

EICHER: Alright, David Bahnson, founder, managing partner and chief investment officer at the Bahnson group. You can check out David's latest book, it's titled Full-Time: Work and the Meaning of Life at David, I hope you have a great week. We'll talk to you next time.

BAHNSEN: Thanks so much, Nick.

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