Zywicki on Interchange
Todd Zywicki has a new paper out on interchange regulation, just in time to support the banks' push against the Durbin interchange amendment in conference committee. The paper doesn't present any new arguments or evidence. Instead, it presents a highly polemical form of antiregulatory claims.
There's an awful lot to criticize about this paper, starting with its complete unwillingness to engage with pro-regulatory arguments and evidence on anything beyond a strawman basis. The omission of the findings of the Reserve Bank of Australia (and reliance on a MasterCard funded study instead) on the impact of Australian regulation is remarkable.
But don't take my word for it. Zywicki gets spanked around pretty soundly by the Australian economist Joshua Gans, who objects to the way his work is used by Zywicki in a "very selective and misconstrued way" in a paper whose "broad conclusions" are "flawed."
Let me add my own broad objection (I'll probably blog on more of the details later). Zywicki's general assumption about bank regulation is that if fee type A is regulated, then fee types B and C will increase to offset the regulation. That might be the result; indeed, it is a variation on the whak-a-mole bank fee thesis (also here), that if fee A is banned, new fees B and C will sprout up.
But there is another possible regulatory outcome that Zywicki never considers: banks might simply have to endure lower profit margins. If the consumer side of credit card pricing markets is competitive as Zywicki believes (I've got my doubts, which is the point of the whak-a-mole thesis), then the result should be smaller profit margins, instead of shifted fees. Zywicki seems to take it as a given that banks must maintain profitability levels. But they don't. That's the nature of capitalism: bank have a right to make a profit, but only through fair and legal competition. If a bank can't operate profitably under those conditions, should it really be in business?