Unintended Unintended Consequences

Some unintended consequences are fairly predictable, even if they’re unintended. For example, if the government imposes a 100% puppy tax on families with puppies to provide non-puppy families with free puppies, it’s not hard to figure out the consequences: Folks who get free puppies will be happy (the intended consequence), but families who have to give up their puppies will inevitably be sad (ostensibly, the unintended, but entirely predictable, consequence). In fact, the folks who give away their puppies are likely to feel much worse about the loss than the folks who receive a puppy enjoy their gain—a concept commonly known as prospect theory, and one we’ve discussed here before.

But sometimes, even the unintended consequences are seemingly unintended—which speaks to the inherent difficulty in attempting to legislate any (allegedly) desired outcome. Most recently, it seems a spat’s growing between “small” and “large” banks (how either is defined is unclear at this point) over whether the government should extend its unlimited deposit guarantee program.

As a refresher, the program was born amid 2008’s financial crisis and provided unlimited deposit guarantees to financial institutions—as opposed to the normal insurance the FDIC provides of $250,000 per depositor. The catch: The insurance only applied to zero-interest accounts. In other words, to an extent, it incentivized corporations and others with significant cash balances to move them to accounts paying zero interest but at least guaranteeing the insurance coverage.

So if the program is now allowed to expire, as some fear may happen, the assumption is many of those dollars (to the tune of up to $1.4 trillion according to most sources) would begin flowing toward accounts more likely to earn a return—ostensibly, those provided by “large” banks, who have more offerings (like money market funds, for example). The assumption also is corporations with significant enough cash balances will want them housed at financial institutions perceived (implicitly or explicitly) “too big to fail.”

In other words, the government’s effectively set up an “us versus them,” regardless of its originally noble-enough intentions, between smaller and larger financial institutions. And (of course), politicians are starting to take sides—some suggesting continuing the program would signal the financial system is still unhealthy and in need of a backstop. Others have already introduced legislation to extend the guarantee program (known as the Transaction Account Guarantee, or TAG) for another two years.

Which side’s argument has more merit or which side politically is better advised is not our point. (Though our hunch is, whichever side wins, some will win, others will lose, and markets and businesses will adjust accordingly over time. It seems to us we survived a very long time with FDIC guarantees on only the first $250,000 of deposits—arguing against significant, immediate catastrophe if we return to that general structure.) Our point is the inherent difficulty government involvement presents. In attempting to “help” situations, the government creates winners and losers; it creates interested parties; it creates lobbies for various causes. Sometimes for a sound enough reason; but often, in our view, for not really great reasons at all.

And here’s an example where an industry will bicker within itself and lobby and write op-eds and lobby until the bitter end because the government’s original action has brought us to the point where there will be costs if legislation sunsets. A timely warning to us all as we approach the holiday season and traditional year-end conventions: Be careful what you wish for.