Tuesday, April 11, 2006

Those who fear Wal-Mart and call for "separation of commerce and bank"

When I first heard that Wal-Mart might go into banking, I was quite intrigued. Imagine the great physical convenience for the millions of Americans who shop at Wal-Mart. Also, with its giant financial infrastructure already established, Wal-Mart could probably offer very competitive rates and services. On top of loans and investments, Wal-Mart could use deposits for its own internal purposes: building new stores, expanding existing ones, and increasing supply lines, things that might yield better returns than investing deposits in more traditional ways. No wonder banks complained from the start that Wal-Mart shouldn't be allowed -- they were, without a doubt, scared!

But, Marshall Manson reminded me earlier in a regular e-mail that Wal-Mart isn't actually going into commercial banking. What it wants to do is establish its own industrial bank to reduce its costs of processing credit and debit card transactions. Since Wal-Mart is almost notorious for aggressive price competitiveness, we can bank (pun intended) on it turning the savings into even lower prices. This is far more beneficial to the poor than forcing Wal-Mart to pay higher wages and offer health care benefits, which only causes Wal-Mart to raise prices, hire fewer people, and not even build a new store somewhere.

Marshall wrote:
Wal-Mart is not interested in opening bank branches now or in the future. You will not see a Wal-Mart Bank in a Wal-Mart Store.

What you will see is more than 1,150 independent community bank branches in Wal-Mart stores. And we have agreements for another 250 branches....

Wal-Mart's largest competitor, Target, operates its own industrial bank, as do General Motors, GE, Toyota and many others. Indeed, more than 60 industrial banks, owned by diversified firms and commercial entities like Wal-Mart, are operating today in the United States.
So we won't see Wal-Banks (yet), but bank branches opening in Wal-Marts is still a terrific thing. Wal-Mart always seems to be a step ahead in redefining the phrase "one-stop shopping." Many people already need drive to just one place for hardware, shampoo, DVDs, music, electronics, one-hour film developing and even a Subway lunch. Now they can do their banking without having to drive elsewhere and search for a parking spot. Who doesn't like the extra free time because one no longer has to make several stops? And if it's not that great an idea, and/or if the banks have poor service, people won't go for it.

The FDIC hearings began today on whether Wal-Mart should be permitted to open its own Industrial Loan Corporation. The question isn't why, but why should it prevented? Is Wal-Mart harming anyone through force or fraud? I really can't see how. If people do not like Wal-Mart's business practices, whether the wages it pays or that it might have its own bank, they are free to take their business elsewhere. Conversely, if Wal-Mart can improve its own business model and get more of my business, so long as I harm no one else, what concern is it to anyone else?

Marshall pointed me to a Seattle Times article that I found ridiculously one-sided. At the very start, it accused Wal-Mart of "ever looking for ways to expand its already huge empire," and that "such a step could hurt local banks much like the mom-and-pop stores were during Wal-Mart's rapid expansion." There's a superficial explanation of what Wal-Mart wants to do, but lengthy details of the various complaints against Wal-Mart (which turn out to be banks' protectionism). Yet nowhere in the article, that I can see, does it mention that Wal-Mart having its own industrial bank would save its customers money.

"Concerns are twofold. One is the mixing of banking and commerce — parts of the economy that have traditionally been separate." Since when was there an economic maxim or absolute principle dictating that "banking" and "commerce" must be separate? What property of a retail company makes it inherently untrustworthy as a bank? "Traditionally" has long since gone past the wayside, anyway, and let's be mindful that "tradition" can be a stupid excuse when we're clinging to an erroneous idea. Similar to the anti-Wal-Marters' irrational call for "separation of commerce and bank," the Glass-Steagall Act in 1933 forbade a firm from doing both commercial and investment banking. Such banks were an easy scapegoat for the Great Depression, but the myth of mutual exclusivity was destroyed in 1999 when Bill Clinton signed the Gramm-Leach-Bliley Act. Firms like JP Morgan Chase have been doing just fine engaging in both investment and commercial banking, yet for several decades, banks "traditionally" didn't do both.

Side note: the banking problem of the Depression wasn't that banks accepted deposits while also underwriting securities. The main problem wasn't what banks were doing, but that the Fed inflated the money supply during the 1920s, creating an artificial boom, then suddenly pulled the rug from under the banks with a massive tightening at decade's end (cutting the money supply by a third!). The resulting artificial depression forced people to withdraw their savings, and these "runs" on the banks forced many into bankruptcy. For my other entries on the Great Depression and why government made it last longer than it should have, see here, here and here. Just don't be like the ignoramus I refuted here, a leftist who thinks the free market caused the Depression.

The Seattle Times article stated, "The other is concern that a Wal-Mart bank could swallow local banks with its national presence and deep pockets, outcompeting even large institutions such as Bank of America, Chase and Wachovia." So are other banks, even the giants, so uncompetitive that they'd be like the old, inefficient "mom & pop" stores that Wal-Mart drove out of business? I can't say that I'll shed a tear for them. If Wal-Mart can provide the same service or better service with greater efficiency, why is that a bad thing? Why is government so insistent on propping up the uncompetitive dinosaur businesses, which merely makes goods and services more expensive than they should be for consumers?

"Federal Reserve officials also have weighed in to urge Congress to close a legal loophole that allows nonfinancial companies such as Wal-Mart to open industrial loan corporations." Even if Wal-Mart wanted to go into commercial banking, why should it not be allowed? Are consumers not free to choose to bank at a Wal-Bank or not to bank there? But the central planners, in their eternal arrogance, think they know better than we do how to run our own lives. Why should the Federal Reserve, FDIC or Congress have any powers over the peaceful, voluntary commerce that I choose to do with Wal-Mart?

Worse than the do-gooder central planners are the anti-Wal-Mart crowd. Their position is so weak that, as always, they can't compete, and their protests are so ineffective (100 million Americans each week still think Wal-Mart is good enough to shop at), so they abuse the power of government. This time they're allied with major banks who oppose Wal-Mart having its own industrial bank. Naturally, because the banks like that current government regulations force Wal-Mart to give them business. Otherwise, the banks would lose not just Wal-Mart's business, but business from other major companies that would follow Wal-Mart's example and set up their own ILCs. In other words, Wal-Mart's freedom to improve its business model is a threat to banks' monopoly -- and remember that true monopolies originate and are sustained only through government. In this case, through the Federal Reserve and FDIC.

I've blogged before on how the Fed's monetary powers are an invisible way to confiscate ordinary people's wealth. The FDIC sounds like a good idea, but let's not hold our breath waiting for a free lunch. In fact, the FDIC does nothing but promote a moral hazard: banks can make riskier loans and investments because they know that deposits are insured. Though banks pay "premiums" to the FDIC, like with any business, all costs are ultimately borne by the customer. Shouldn't it tell us something that even Franklin Delano Roosevelt initially opposed deposit insurance?


Anonymous Anonymous said...


Good article Perry - take a look at the above link.

Tuesday, April 11, 2006 9:07:00 AM  
Blogger Perry Eidelbus said...

You are too correct, Michael. Even if we exclude the moral component from the discussion, you are correct to point out that the liberal environmentalist nutcases want us to pay more to get less. WHY? Only a fool (or a liberal, actually those are the same thing) pays $2 when he KNOWS he can get the same or equivalent for just $1.

Leftists' continued intellectual and moral bankruptcy never ceases to amaze even me. "Even me" because I once embraced certain leftist principles, and I know how they think. That is, generally: they always come up with new doozies.

Tuesday, April 11, 2006 3:51:00 PM  
Blogger TKC said...

The local Giant and Safeway (grocery stores) have bank branches inside of them. This is hardly anything new. They're just trying to be more convienent. Heck, the one Safeway has a Starbucks and Drycleaner in it.

Tuesday, April 11, 2006 4:59:00 PM  
Blogger CaptiousNut said...

I am sure that some of these people who fear WMT going into banking have also decried "excessive consolidation" in the banking sector. Every time ATM fees tick up .25 you see this criticism.

It's quite redolent of those complaining about dependence on foreign oil and at the same time restricting domestic exploration and development.

Tuesday, April 11, 2006 5:33:00 PM  
Blogger Perry Eidelbus said...

Several years ago, I used to bank at the second closest branch to me. Why not the closest? Because the second closest was inside a grocery store. The closest was along the way, but the second closest was a little bit more convenient. It was even open on Saturdays till 5, and Sundays till 1.

Interesting that you mention ATM fees, CN. Some banks are starting to offer reimbursements for using other ATMs, provided you keep a minimum balance. Gotta love competition.

Thursday, April 13, 2006 12:50:00 PM  
Anonymous Anonymous said...

Um hello??? Industrial banks are one thing. Perhaps Wal-Mart should be allowed to have an industrial bank. However, this is a bigger debate about the mixing of banking and commerce. I don't disagree with your article except for one major thing. Wal-Mart should not be allowed to open its own commerical bank and invest in itself. That would mean the FDIC granting insurance to a non-financial company. In essence it would be the taxpayers insuring Wal-Mart stores. If you don't see a problem with that then something is wrong with you.

Tuesday, October 17, 2006 5:50:00 PM  

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