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Home Publications Blogs Beat the Press Nonsense Doesn't Make Sense Because a J.P. Morgan CEO Says It

Nonsense Doesn't Make Sense Because a J.P. Morgan CEO Says It

Friday, 16 July 2010 15:01

The NYT had a piece reporting on how banks may alter their business practices in order to make up for provisions in the financial reform bill that could reduce profits. The article notes that banks may start charging for some services that they currently provide free to customers. For example it reports that banks may no longer offer free checking, instead charging most customers fees for their accounts as a way to make up for lower margins on credit and debit cards.

The piece then quotes J.P. Morgan CEO Jamie Dimon:

“If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger. ... Over time, it will all be repriced into the business.”

Actually, this is not typically true. If a particular restaurant charged high prices for its drinks in order to subsidize its burgers, then we would expect many customers would just buy the burgers and order water. The restaurant would only be able to get away with its burger subsidy strategy if it either did not offer the customer the choice of just getting the burger or if there was collusion with other restaurants. This suggests collusion in the highly concentrated credit and debit card industry, which would mean that anti-trust action would have been appropriate in the absence of the restrictions in the new law. The implication is that banks used their market power to have customers subject to overdraft fees or users of debit cards subsidize the checking accounts of customers who did not paid these fees.

It also is worth noting that banks' profitability will not necessarily be restored to pre-regulation levels. This would only necessarily be the case if banks were just making a normal profit, below which they would go out of business. Certainly J.P. Morgan and other large banks are making more than a normal profit.


Comments (9)Add Comment
written by Queen of Sheba, July 16, 2010 4:07
Well it certainly didn't take the bankers long to start thinking of ways to get around the new regulations - at least to think up ways to shaft their customers to make up for any losses, however slight, they may incur.

And this is just the beginning. I'll bet they have a whole back room full of number crunchers and lawyers going through the bill, line by line, to figure ways to skirt or twist or simply ignore any of the regulations, figuring the fine for doing so will come nowhere near the cost of abiding by the reg's. And after seeing the settlement amount the SEC agreed to with Goldman Sachs, how could they think otherwise?
written by Bloix, July 16, 2010 4:31
Another example of an economist's knowledge of what the world must be like triumphing over what the world actually is like.

Restaurants do mark up soda (and wine, and fries, and bottled water, and coffee) more than they do burgers. They find that customers compare prices based on the higher-cost items and are less price-resistant to high mark-ups on the lower cost side items. That's human behavior- no one ever said people are rational:

"you don’t make all that much on the burger, but if you suggest grilled onions on that burger (costs 5 cents, sells for 79 cents) there’s your spread ... And fountain sodas? Like printing money -- syrup and carbonated water, maybe 2-8 cents per glass, but you are selling it for $1."

written by izzatzo, July 16, 2010 5:00
We have deregulation to thank for unleashing the power of free markets and competition, and now the stupid liberals want to crush it by forcing the fine print to be in a larger font size:

Sign here and get a 0% credit card rate for the next 6 months after transferring a minimum balance of $1M into your account. All terms and conditions subject to change after you become a captive customer.

Get one billion unlimited cell phone minutes per month for only $50/mo on a use it or lose it basis, which expire at the end of each month and must be repurchased. Cell phone is free and all calls must be between 2 and 4 AM.

Get one thousand cable tv programs free for 6 months, then a lifetime rate of $300/mo. Minimum contract period, one lifetime. Also required with purchase of broadband service, and soon to come, required with the purchase of water and electricity after it's privatized.

This bill is for $.03. Failure to pay it in full within 24 hours will result in a penalty of $10, which if not paid in 24 hours of the first 24 hours will result in a penalty of $100, where the third failure to pay results in destruction of your credit score.

Buy one item from us and we will track you down for the rest of your life with follow up offers while selling your contact addresses to the world.

No, terminal cancer was not covered. Only temporary cancer is covered to prevent gaming of the insurance, but the aspirin is still free. Have a nice day.

The regulations will undermine our cross subsidies based on market power and force us to sell at normal profits while competing with others who are not too big to fail.

No more phony freebies, crass come-ons, bait and switch, hidden penalties and fees, last minute add-ons, retroactive charges, lock-ins, forced bundles and tie-ins and blocked access to customer service to explain any of it.

Buncha goddamn commies you are, trying to make free markets and competition work the way we lie about them in our propaganda, so you've decided to force us to provide what we promise or give the business to some competitor. Now we have to raise prices, reduce investment, cut employment and accelerate the deep depression, thanks to stupid liberals.
written by skeptonomist, July 17, 2010 8:47
Banks have been providing credit cards, a useful service. They also use credit cards to pad their profit margins through deceptive practices. Credit cards are also used to expand credit, which may be good in some circumstances and bad in others, but in other areas of the economy the usurious interest rates charged on credit-card debt is considered evil and even outlawed.

Most of the useful aspects of credit cards are those of money, which is otherwise provided and regulated closely by the federal government. Credit cards have largely replaced currency and checks in everyday transactions, and rational evaluation of the role of credit cards would include consideration of whether the service would better be done by the government, as in the past it provided currency.
written by David S., July 17, 2010 10:20
Mr. Dimon's comment is either disingenuous, a demonstration of economic ignorance.an admission of poor managementor an exercise in public deception.

If a bank could recoup new statutorily-induced losses on one service (a loss which correspondingly benefits consumers by capping fees or interest) by raising fees on another service, it must be true that the bank had been failing to impose the profit-maximizing fee on the latter service in the first place.

Since well-performing insitutions do not customarily fail to charge a profit-maximizing price, it is reasonable to assume that the latter fee simply cannot be increased in a profit-maximizing manner.

Of course, it is conceivable that Mr. Dimon was acknowledging that his bank had failed to keep fees at profit-maximizing levels, but I suspect that it is not the message he was intending to disseminate. Also, as Dean notes, his bank earns extremely high profits, suggesting that underpricing was not the problem.

As for the issue of bundling, there is a rich body of economic literature, Again, economics teaches that a maximum price will be set for the bundle, such that an increase in the cost of one item within the bundle canno simply be offset by increasing the price of other items in the bundle.

I believe that, even if collusion existed in the banking sector, tacit or explicit (and my natural skepticism makes me believe that it does), that would not affect the capacity of banks to pass along the new cost of the statutory changes -- bundled or unbundled -- unless the capacity to conclude on the margin had also increased. (Perhaps it did, or will, since the financial sector is becoming more concentrated.)

It could be argued that the costs imposed by the statute will impact the price paid for the item subject to the cost increase to the extent a downward sloping demand curve exists for the service. Then, in that market -- not the market for some other service (unless offered solely as a bundle) -- the price will partially increase, with the amount of price increase and the amount of profit loss determined by the relative slopes of the cost curve and the demand curve. The supply of that service would also be reduced.

Couldn't Mr. Dimon have consulted with his in-house economic team before going public -- or did he want to send a message that government intervention can never be effective? Would business leaders really engage in such deception?
written by liberal, July 17, 2010 11:30
Certainly J.P. Morgan and other large banks are making more than a normla profit.

Those aren't profits. They're economic rents.
Excellent point — Think movie theaters
written by Hugh Sansom, July 18, 2010 11:28
Movie theaters do indeed charge more for snacks and drinks to try to make up for ticket revenues that largely go to studios in the first week or two of a movie's release.

Big surprise, people bring in their own drinks and snacks and movie theaters post policies trying to mandate buying snacks, etc., in the theater and forbidding bringing stuff in.

Likewise, airlines have taken advantage of the draconian stupidity of homeland security policies to boost prices on in-flight drinks — something they couldn't do until the government handed them the means.
Did Dimon Slip Not Once but Twice?
written by William Hurley, July 18, 2010 9:09
Mr Baker

As you illustrate, JP's Dimon may have let slip a view to a practice that, if in fact in place, would be hidden as it would be illegal. Did he slip a second time in suggesting that, on the "transaction"-side" of the business, JP's pricing will "balance out", which you show to me counter-intuitive and counter-factual, because on the "accounting-side" JP will simply fit the facts of the data to the outcomes they prefer to say occurred?

Nickle & Diming
written by DHFabian, July 21, 2010 10:24
Banks have been nickle & diming low-to-mid income customers for years. If you have under a couple hundred in savings, it'll cost as much as $5.00 simply to cash a paycheck. Checking accounts run into a lot of money, so many prefer to pay their bills with money orders -- which cost $3.00 to $5.00 apiece. The list goes on, and this has proved to be quite profitable for banks. Credit unions have been racing to catch up. I would be surprised if banks didn't expand these practices to all but their richest customers. So, what can we do about it? Not a whole lot.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.