Bank Overdraft Brouhaha: Why Can't People Take Responsibility for Themselves?

I can't help but keep finding points of contention with Felix Salmon at Reuters. I think he writes well and I'm sure he's great to have a beer with. But he exemplifies the current environment of bank-hatred whereby hatred for their deserved wrongs has spilled over into a generalized resentment for a wide range of activities banks do and a desire to command them centrally, based on wherever the latest gaze of hatred happens to fall.

In a recent post he decries the "Scandal of Overdraft Fees", whereby one is basically charged a fee if you draw more money than you have in your account. He points out that they are frequently high ($25 range) relative to the offending average overdraft ($36) and how it's the poorest bank customers who pay the majority of overdraft fees. He then expands the hate to all fees in general, points out that banks earn a substantial portion of income from fees, and then concludes it's a raw deal and thus must be stopped. It's this final recommendation that haunts me most.

I'll simply address the attack on overdraft fees for now, to keep things focused. Look, I've been both the recipient of excellent banking service and on the tail end of fees as well. And I realize that frequently it's the poor who mismanage their money, thus succumb to fees, credit card interest, etc. Nevertheless, while some uniquely dastardly and heart-wrenching stories can come out of the woodwork, overall I believe we need to keep holding people responsible for their decisions and personal management. The beauty of holding people responsible is that we have less right (usually no right) to go and meddle with their personal affairs. While the darkside of nanny-stating and parenting people is that it opens the door to meddling with their lives and restricting their freedoms.

For example, if I don't pay a welfare wage to my neighbor, then I have no right to oppose him if he just sits around smoking marijuana all day. But the second I am required to pay for when he isn't working, then suddenly I can make an argument for why I find his lifestyle too lazy (or whatever one wants to call it), and why I have a right to intervene. The same goes for managing one's finances. The second I am forced by law to support someone who mismanaged their money, then I suddenly have an argument to go in and force some change in their lifestyle. Or if they are obese but I pay for their healthcare... then suddenly their obesity becomes a cost to me and I start asking for controls on their lifestyle. See, this is the danger to freedom that the removal of personal responsibility presents, and I think many people, such as Mr. Salmon by the nature of posts such as the above, misunderstand. The more other people support us, the more claims they have on our life's decisions since our life decisions suddenly have forced claims on their property.

So let's come back from the top-level issue which frames the problem, and come back down to the overdraft fee issue in particular. In addition to the greater implications emotional and arbitrary calls to "put a stop to this or that" have in regards to our tolerance for others' freedom, while overdraft fees are quite high, at the same time they are usually easy to see once they hit you. I've been hit by them in the past, I got burned, and I became double vigilant not to get burned again. If someone is hard up for cash, there are better ways to get short term loans, actually a credit card, though expensive, is probably cheaper than overdraft using the numbers Mr. Salmon mentioned. I doubt the majority of people who pay frequent overdraft fees don't have an alternative method to manage their cash, or aren't able to see these fees by checking their statements. If they managed a budget they would notice some money missing. As seen with credit cards, some people just need to manage themselves better. There are people in developing countries with far less education than even lesser-educated Americans who can effectively manage their money and even utilize high interest loans from loan sharks (who exist as a black market since bank interest rates are capped).

And just to help show I am not cherry-picking a single post of Mr. Salmon's, here is a second recent one which runs along the same vein of not holding people responsible for themselves. It's where he calls for heavy regulation (why don't we just come out and say ban) for "business opportunity scams". You know, get-rich-quick type offers that I think most people with two bits of common sense simply laugh at. It sounds righteous to say these are bad, so let's heavily regulate them, but with such action you will end up creating a nightmare for a lot more reasonable business opportunities, adding legal fees (to cover your butt ahead of time) to, say, a fledgling franchise business.

You also aren't simply asking people to be skeptical in life, learn from mistakes, and generally be responsible for their decisions. I bet you can take the claims of these schemes to lots of street-market-hardened people in a developing country and they'll see right through them as not the best of opportunities. And I can't even imagine the nightmare of how the concept of a "bad opportunity" or a "rip off" could be twisted around to justify a lot of unfair verdicts.

This line of thinking is likely to be continued. "Protecting society" is the innocuous beachhead from which a population's rights are assaulted. And usually to the detriment of small upstarts rather than big business.

Comments

[Davewmart:]

'For example, if I don't pay a welfare wage to my neighbor, then I have no right to oppose him if he just sits around smoking marijuana all day.'

Exactly. Since dead-beat bankers have got into the taxpayer for trillions, whilst continuing to pay themselves vast bonuses from the bankrupt but for the grace of bought politicians companies they have gutted, then they can expect criticism for their inability to manage money.
The fact that they are being allowed to reconstitute their zombie banks via larcenous charges to their customers indicates the degree to which the legislature is in their pockets.

Jul 02 04:23 PM

[Bylo-:]

Finally - FINALLY! Some common sense about the bank charges. Lets face it, too many people are simply not responsible with their money so why should I have to pay for their mistakes? The credit card companies call me a "dead beat" because I pay off my card each month.

I also agree with you about Mr. Salmon. Good article Vince.

Jul 02 04:24 PM

[dcb:]

First.
1) on debit cards you automatically get overdraft protection now instead of not being able to withdrawl money
2) loan sharks and payday loans actually charge less
3) we have decided that banks are systemically impt and not allowed to fail because they are required by society. anything that is requred should not be allowed to rip you off.
4) At some pont the profits one makes on something that requires no work and is done by computer is obscene. I get 1.5% interst if I am lucky, the penalty should be based upon the amount of interest I receive from the bank and the amount the bank is charged for having to borrow those funds. I do not have access to the fed to borrow and pay my bills. the bank does. Why should I be paying a simple middle man in that transaction such high a margin? In truth you shouldn't.

In fact I am being held hostage by a required and necessary public entity. What if I have to overdraft to feed my children because I am underwater on a home loan that was sold to me via fraud.

Banks are middle men and paper pushers, nothing more. the very idea that their service is something that provides great value is false. It is a myth they employ to justify their behavior.

Jul 02 05:22 PM

[Vincent Fer...:]

In response to Davewmart, I think you raise a point I agree with. A lot of the anger towards banks could have been avoided by not bailing them out. The taxpayer bailed them out and then suddenly can pick them apart and get angry about salaries, practices, etc. Had they not bailed them out then one of the biggest arguments against them (they used taxpayer money) wouldn't to create the current witchhunt atmoshphere wouldn't exist.

Jul 02 06:18 PM

[Gadz:]

Excellent post.

People NEED to start taking responsibility for themselves.

Sadly, our "leaders" are often the ones who take the least amount of "responsibility" for their actions.

The average person figures he can and should act the same way.

Jul 02 06:22 PM

[Vincent Fer...:]

dcb, see my response above. I was against the bailout. But to say they don't provide any value is to misunderstand how the economy works and all the services they provide. The fact that Google was able to grow so fast and take over the world within just a few years was due to the US capital markets. In most other countries, a good idea like google would have taken ages to get enough financing, and by then its competitors would have built themselves up. Thats just one example. I think if you truly don't think banks provide value then stop using them.

Jul 02 06:22 PM

[Davewmart:]

Vincent said:
' A lot of the anger towards banks could have been avoided by not bailing them out.'
I goes deeper than that.
The financial sector has seized control of the system so that it represents in the US and UK a far greater percentage of 'profits' than 30 years ago.
As Adam Smith was well aware, such tradesmen will always conspire against the public interest.
A modest function of oiling the wheels of commerce is transformed into a succubus, which has demanded from it's client politicians that the huge gambles it has taken be bailed out, whilst simultaneously utterly failing to fulfil the sole reason for it's existence, to mediate savings to productive enterprises.
Instead it continues to divert monies it raises by usurious practises to gambling, since it is in a win-win situation with guarantees against failure.
Societies throughout history have had provisions against usury.
Funds which could have bailed out people who bought houses have instead bailed out the banks and bondholders.
The moral outrage against the small people who have over-committed is ludicrous when set against the completely irresponsible creation of a Ponzi scheme by those such as Paulson and the other heads of banks and politicians who have scarpered with the loot.
Most of these individuals should be facing Rico charges.
This is not capitalism but corporate fascism which will impoverish the general populace.

Jul 02 06:42 PM

[Steve in Gr...:]

Thanks, Mr. Fernando. Your common sense in this note earned a follower. The project of the Left is to infantilize U.S. citizens in order to make them all clients of the Nanny State.

Jul 02 06:44 PM

[Ian Myslivec:]

I would have no complaint about overdraft fees if I was allowed the option of not being able to overdraft. If this was clearly presented when I opened an account, I would have no sympathy for the people who chose the overdraft option and got burned.

But I don't. My bank (for my 'convenience') lets me overdraft for days on end, racking up a nice little fee every time.

Jul 02 07:29 PM

[Steve in Gr...:]

Ian: Here is a personal financial planning tip. Here is how I avoid overdrawing my checking account. I do not write checks for more than I have in my bank account. It works for me. You might try it.

On Jul 02 07:29 PM Ian Myslivec wrote:

> I would have no complaint about overdraft fees if I was allowed the option of not being able to overdraft...But I don't..."

Jul 02 09:41 PM

[ANDY70139:]

THE DAILY PRACTICE OF ALWAYS PROCESSING CHECKS WRITTEN BEFORE PROCESSING DAILY CUSTOMER BANK DEPOSIT WAS INSTITUTED FOR ONE REASON AND ONE REASON ONLY -----OVERDRAFT INCOME FEES FOR THE BANK.
IT MAY BE LEGAL BUT CERTAINLY AN UNETHICAL BUSINESS PRACTICE PROTECTED BY CONGRESS AND THE FED.
WHO CONTRIBUTES MORE TO THEIR SUCESS?

Jul 03 10:10 AM

[JK Corcoran:]

Andy, I have worked in banking for over twenty years at many institutions including money center banks. Every bank I worked at required that deposits be processed and posted before debit to the customer account. Any bank that does not follow this policy would quickly find that their customers have gone to the savvy competitor who has pointed out the flawed policy to the customer. Competition solves this issue.

As far as blaming banks for this mess, please take a look at what has been required of banks ever since Jimmy Carter instituted the CRA Act. This act states that banks are required to lend a certain percentage of their portfolio to people who cannot pay the loans back. Barney Frank and friends raised the CRA requirement at Fannie and Freddie to 50% of the portfolio just prior to this meltdown. The banks and other lenders scrambled to find solutions to this huge liability...after all, the same regulators can close down a bank that they feel has too much risk in their portfolio. So, the big brokerages addressed this new demand in the market with securitization of these loans. The politicians loved it, the stock market loved it, demand increased to unsustainable levels, and we have ended up where we are now. Blaming a group that followed regulations and threats from our government may feel good, but it does nothing to solve the problem.




On Jul 03 10:10 AM ANDY70139 wrote:

> THE DAILY PRACTICE OF ALWAYS PROCESSING CHECKS WRITTEN BEFORE PROCESSING
> DAILY CUSTOMER BANK DEPOSIT WAS INSTITUTED FOR ONE REASON AND ONE
> REASON ONLY -----OVERDRAFT INCOME FEES FOR THE BANK.
> IT MAY BE LEGAL BUT CERTAINLY AN UNETHICAL BUSINESS PRACTICE PROTECTED
> BY CONGRESS AND THE FED.
> WHO CONTRIBUTES MORE TO THEIR SUCESS?

Jul 03 10:46 AM

[Vincent Fer...:]

Steve: I am a big fan of one of your comments above, I quoted it on ym site. "And while I'm at it, I thought the following Seeking Alpha comment was a pretty concise bank fee management recommendation. "Steve in Greensboro", in response to people decrying overdraft fees: "Here is a personal financial planning tip. Here is how I avoid overdrawing my checking account. I do not write checks for more than I have in my bank account. It works for me.""
researchreloaded.com/c...

Jul 04 03:29 AM