Having spent a great deal of time in playgrounds???first as a child, then as a parent???I???ve learned some important lessons. First, bringing together children of disparate ages and skills invariably leads to conflict. Second, learning how to resolve those conflicts teaches important life skills. But perhaps most importantly, I have found that left to their own devices, kids usually achieve détente far more effectively???and permanently???than do their overseeing parents. For an observable lesson in spontaneous order, it???s hard to beat a playground.
Yet these days, we hear a lot about ???helicopter parents,??? who seem reluctant to sit back and let the kids sort things out. That???s not a good thing. The bigger issue here in the nation???s capital is that those same parents then leave the playground, drive to their government offices, and apply to public policy the same failed conflict-resolution tactics from the playground. The result? Overbearing ???preventive??? policies like Operation Choke Point.
Operation Choke Point is, at least in theory, an ongoing federal initiative to ???protect??? U.S. banks from fraud by going after some of their clients. In practice, it has become a fishing expedition that threatens the rule of law, civil liberties, the nation???s economy, and some of the poorest people in society. Under Operation Choke Point, the government has harassed legal businesses that have broken no laws and cut many of them off from the financial system. How did it come to this?
Federal regulators are putting the screws to banks and other third-party payment processors that do business with companies and industries deemed to pose a ???reputation risk??? to the bank, with the aim of ???choking??? off cash flow to those industries. It???s not hard to see how this could go very wrong, very quickly.
You can read more about this effort in a recently released CEI study. Officially, Operation Choke Point is a joint effort of the Department of Justice (DOJ), Office of the Comptroller of the Currency, and, leading the charge, the Federal Deposit Insurance Corporation (FDIC). Its purported aim is to protect Americans from falling prey to fraud in a variety of industries the government considers ???high-risk.??? And it???s gone with particular ferocity after the payday lending industry.
The threat to due process is enormous, as the government can isolate certain companies or individuals from accessing the financing they need to operate, without having shown that the targeted groups have in fact violated any laws. Especially dangerous is the lack of a clear definition of ???reputation risk.???
The listed categories of ???high risk??? industries run from suspected Ponzi schemes and get-rich-quick products to tobacco sales, telemarketers, gun sales, pornography, and online gambling. Inclusion on it seems to be based on nothing more than government wishing to assert control over industries it views with suspicion. But as the CEI study???s author, Iain Murray, points out, ???The FDIC???s list of high risk industries seems guided more by moral censure than by any real prospect of criminality.???
Operation Choke Point also threatens civil liberties. Some porn stars have had their bank accounts closed solely for pursing a choice of employment of which certain government officials disapprove???a choice of employment, by the way, protected by the First Amendment. And some firearms dealers have seen their bank accounts suddenly closed because of Operation Choke Point???which raises some troubling Second Amendment implications.
Operation Choke Point also poses a major threat to the nation???s economic well-being. Banking is already a highly regulated industry, so any additional regulatory compliance costs are bound to place a significant burden on small and mid-size banks, which cannot afford the extra supervision that comes with a Choke Point subpoena. As a result, they often face no choice but to drop their ???high-risk??? clients.
Finally, Operation Choke Point places more roadblocks in the way of ???unbanked??? low income customers seeking access to the financial system. Nearly 10 million, or 8.2 percent of U.S. households were unbanked as of 2011, and 20.1 percent were ???underbanked,??? according to the FDIC. Many payday lender customers lack access to either a bank account or a viable credit rating. Payday lenders help fill in the gap through check cashing and utility payment services, as well as through prepaid payment cards. Without access to those services, many will be tempted to seek out riskier???perhaps even illegal???sources of credit.
Choke Point, through its heavy-handed and overreaching attempt to help the nation???s poorer and more financially desperate citizens, ends up hurting those same citizens in the long run.
I find it a bit ironic that the program is called ???Choke Point.??? I thought we frowned upon using physical force and intimidation to get our way. In the playground, there???s a word for children who act this way: bullies. You eventually learn to avoid them for their behavior. Often they get the message and change. It???s called a market at work. But the architects of Operation Choke Point seem like the bullies who never learned. Now they???ve grown up, and are still trying to get their way.