If you charge more on your debit card than you have in your bank account, your bank will likely cover the difference and bill you later.
The bank will probably charge you an "overdraft service" charge for it, but it sounds like a nice thing for the bank to do, right?
Well, yes, but when did you agree to pay for that service?
Most banks don't ask, enrolling customers automatically, and the service charges can really add up. So, if you buy a $4 cup of coffee with your check card and you only have $3 in your account, the bank can hit you with a $34 overdraft fee.
A lot of consumers and consumer advocates out there--including our publisher, Consumers Union--think that's just not right.
The Federal Reserve Board has proposed a rule change to give bank customers the option of opting in or out of overdraft service.
The Fed has also given you a chance to speak your mind on the issue, but that opportunity is about to end. Consumers have until Monday, March 30 to speak up.
The Administration tomorrow will announce a long awaited plan to help banks grapple with the financial crisis, along with a regulatory reform proposal that would grant the government broad new powers to protect the economy against financial shocks.
The Administration is preparing to spend up to $1 trillion to lift the toxic assets at the heart of the financial crisis from banks' balance sheets. The government plan would create a new entity called the Public-Private Investment Program to held distribute the risk between taxpayers and private investors.
Under the plan, the government would offer billions in low-interest loans to help the private sector purchase toxic assets. Using money from the $700 bank bailout fund, the government would match private investments dollar for dollar and share in both the losses and the potential profits.
The Treasury would also expand its recently-launched $1 trillion Term Asset-Backed Securities Loan Facility to help sweep up toxic assets. The TALF is currently setup to guarantee the loans behind securities backed by consumer debt such as auto loans, student loans, and credit card debt.
The FDIC would also be called upon to share their expertise in managing the toxic assets retrieved from failed banks.
“We’re going to move quickly to lay out a new financing program to deal with these legacy assets,” Treasury Secretary Timoth Geithner told Bloomberg News. “We have and expect to see a lot of support for this program.”
Under the proposed regulatory framework, the Treasury Secretary, with the permission of the President and the Federal Reserve, would be empowered to place into government conservatorship ailing institutions whose collapse could threaten the financial system.
The Treasury Secretary would then be permitted to dissolve contracts and limit payments to creditors. These powers would largely prevent a recurrence of the bonus debacle currently plaguing A.I.G.
The Public-Private Investment Program will be announced tomorrow, with an announcement concerning the new regulatory framework coming by Tuesday.
In a further move to unlock the credit markets' deep freeze, the Federal Reserve announced Wednesday that it would pump more than a trillion dollars into the economy.
"To provide greater support to mortgage lending and housing markets," the Fed will buy:
$750 billion of agency mortgage-backed securities
$100 billion of agency debt
$300 billion of longer-term Treasury securities
The Fed's statement said that it expects the economy to stabilize and grow in the long-term, but it did not paint a pretty picture for the near future:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.
There are ways to fight off the nation's next financial crisis, Federal Reserve Chairman Ben Bernanke said today, but before we worry about that governments must get financial systems working again to stabilize the economy.
Speaking at the Council on Foreign Relations, Bernanke said the U.S. government will continue to pour money into financial institutions if necessary.
"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," he said. "In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn."
He went on to say that new regulations could "make crises less frequent and less virulent."
First among his four reform proposals was to deal with companies that are "too big to fail" before they fail. The government already has Citigroup and AIG on life support--costing hundreds of billions of dollars--and Bernanke, without mentioning any company by name, said the Fed's "commitment to avoiding such a failure remains firm."
"Looking to the future, however, it is imperative that policymakers address this issue by better supervising systemically critical firms to prevent excessive risk-taking and by strengthening the resilience of the financial system to minimize the consequences when a large firm must be unwound," Bernanke said.
The second step would be to strengthen the rules under which the financial markets operate, making sure the infrastructure remains strong in times of stress.
Third, Bernanke said, regulations need to be flexible so as not to "overly magnify the ups and downs in the financial system and the economy," such as allowing banks to lend more money in a bad economy than in a good economy.
Lastly, Bernanke proposed a government group that would monitor and address large-scale systemic problems.
Bernanke said his own agency may or may not be able to do the job but should certainly be involved.
"As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," he said.
The stock markets reacted well to Bernanke's comments, particularly about not letting big banks fail. Financial stocks rallied in the morning, climbing around 10 percent after weeks of declines.
