Friday, October 30, 2009

BB&T Fail: Objectivism Versus Reality

Some time ago, one of my friends in the Econ department said that BB&T had charged her a $5 'Inactivity Fee' on her account.  We all thought this was crazy.  It is perfectly fair for a bank to charge you a fee for doing something that causes costs or problems, but it is completely unreasonable to charge you for not churning your account.  The whole point of a bank is that your money sits there quietly while they use it to earn more money.

I don't know the details of this fee, and I don't care.  My friend is intelligent and financially sophisticated.  She has over two years of postgraduate education in Economics and her husband works at a bank.  If she says that the fee was senseless, I believe her.  If she says it made her angry enough to cancel her account, then that fact alone is enough to ensure that I will not do business with BB&T anytime soon.

I mention this because John Allison, Chairman of the Board of BB&T, recently came to our school to give a couple of talks.  One was to the Econ faculty about his experiences with the economic and banking crisis, and the government's reaction to it.  The other was a motivational speech to undergraduates.

The most interesting thing I learned in the faculty talk was that it is actually illegal to record government officials over the phone.  I was flabbergasted by this.  It seems to me that one of the most essential liberties in a free society is the ability to keep track of what agents of the state do.  If it is illegal to record what they are doing, and share this information with the press, then we have lost a fundamental freedom.  There was a big stink recently of someone being arrested in the UK for taking pictures of a policeman.  But according to Allison, our laws in this respect are just as bad.

But that issue is not the point of this post.  BB&T is.

Allison is known for being a die-hard Objectivist.  He gives millions of BB&T's money away to promote the works of Ayn Rand.  While his economic discussion was not overtly Objectivist, his presentation to the undergraduates was.  I wasn't the only one who noticed this; some guys sitting behind me were commenting on it.  It really was interesting the way he had distilled and repackaged Rand's philosophy into a ten-point self-help 'how to improve your life' talk.

One of the main points he emphasized was honesty, a complete willingness to face reality and adjust your behavior to it.  This in turn implies fair dealing, treating people right.  He talked about how the bank refused to make subprime or predatory loans, because he saw no value for the consumer in them.  This is true, and BB&T is by all accounts a well-run bank that has survived the crisis quite well.

But human nature being what it is, I am far less likely to trust everything he said now that I know his bank is violating his espoused values and hitting my friend with stupid hidden fees.

He would probably argue that he did nothing dishonest, that the fee was in the contract that my friend signed.  And legally he would be correct.  But people don't care what is written in long complicated documents.  That's not how they deal with reality. 

Those contracts are probably never read.  If you actually have the intelligence and education necessary to understand them, then your time is too valuable to spend reading them carefully.  Gossiping among your friends is a much better way to protect yourself from nasty surprises than reading the contracts.  Given the cost of our time, signing whatever is put in front of us and then complaining loudly to warn each other away from whoever mistreats us is the most efficient way of dealing with things.

This, by the way, is one of the main reasons that poor people don't use banks.  Many poor people have bad experiences with banks hitting them with fees they don't understand.  Those check cashing places and payday lenders are horribly expensive, but they are open and honest about their fees.  They charge a simple, easy-to-understand cut off the top, and never surprise anyone with hidden fees and complicated contracts.  This means that nobody ever feels cheated.  It could be argued that poor people are simply purchasing a higher level of service and convenience than people who use normal banks.

These facts lead us to two important contradictions in Objectivist philosophy.  The first contradiction is that they say that all things, including humans, must act according to their nature, but then they actively work to change or deny several important aspects of human nature.  The second contradiction is that they say that we should always act in accordance with reality, but they refuse to accept or adapt to the reality of how most humans think and act.

Objectivists, many economists, and most libertarians share the implicit assumption that all people are willing and able to read and understand complicated contracts, and that they have a meaningful choice among different contracts.  They believe that people should be bound by whatever is in the contract they sign, and that it is irrational to complain about anything in a contract you signed.

But people don't view the world that way.  They see the contract as just another piece of meaningless paperwork, especially if it is too long and/or complicated for them to understand.  The cost of reading it is simply much higher than the benefit.

This is especially true because nobody has any real choice about the contract they sign.  If you don't sign the contract, all you can do is go to another bank that offers a contract that is 99% identical.

So people's mental idea of 'cheating' or 'dishonesty' has nothing to do with the contract.  It is based on how the behavior of the bank or company matches their expectations.  Most of us have an idea of what a bank should and should not be doing.  We expect banks to act according to those expectations, those social rules.  When they don't, we feel cheated and get angry.  And we talk about who made us angry and warn our friends about them.  In the end, this is a much more effective policing mechanism than courts and a lawsuit.  A company can usually survive a court settlement, but a loss in market share will kill it.

'Objectivists' who do not understand this fact about reality or refuse to acknowledge it are doomed to failure.

In addition to this fact, most bankers just don't understand how their entire business model is a creation of the state.  The fundamental difference between a banker and a mafia loan shark is that the mafioso has to pay someone to hunt down and punish delinquent borrowers, while the banker can get the state to do it for free.  Banks have lower operating costs and can charge lower interest rates because the machinery of the state exists to do all their contract enforcement for them.

Given that the government is providing free kneebreaking services for the bank, it is perfectly fair for the government to have some input into how the bank is run.  At the very least, the government should be able to choose not to enforce certain contracts.  The government is a tool of the people, and it would be wrong for it to enforce contracts that harm the population at large.

I definitely support anything that makes deals more transparent.  Consumers should be told, up-front and in meaningful terms, what they are getting into.  Financial products should be labeled in a standard way, just like food products are, so people can compare them with minimal effort.


Lou said...

Thoroughly enjoyed this post....Nice connection; mafia & govt. Dad

rtaylortitle said...

I know many people today, quite a few of them senior citizens, who will actually ask questions when they open a bank account or retail account...I do as well.
Such simple questions as "What fees will you charge?" can be asked whether you read the contract or not. I think it would naive for a bank not to charge a minimum activity fee. If I didn't like it, either before or after I opened the account, I could opt for another bank (many banks don't charge such a fee).
As a "wise" 63 year old Objectivist & libertarian, I see no breach of either with fact, quite the opposite.

The Lost Goat said...

I can't agree that the banking model is a construction of the state. The mere existence of black-market loan sharks proves that some banking services would survive whether or not government existed to regulate them.

One of the services that a just society provides for its members, both actual and legal, is the enforcement of contracts. To the extent that the legal personages represented by banks take advantage of that, you are correct that they have contracted out the knee-breaking services of the government for themselves.

I don't think the question is whether we can legislate what kind of contracts are enforceable by our society - clearly it is the duty of our society to determine that, and of our government to enforce it. The question is rather what sorts of contracts is it a good idea to refuse to enforce because of the way they are written.