The Politics of the Durbin Rulemaking

It goes without saying that I think the Fed did a real jerk move on the Durbin Amendment rulemaking. But the more interesting issue is why? 

The Fed didn't have any new data to work with after the proposed rulemaking in December. Sure, it had lots and lots of comments, and there was some a crazy amount of lobbying. But it's hard to see what that lobbying would have accomplished in the January-June window that it hadn't in the July-December window. 

Instead, I think that the volte-face was the result of bigger picture Federal Reserve Board politics. For the Fed, interchange is the regulatory issue that they have with merchants. The Fed doesn't have to handl-vandl with merchants on other regulations. But the same can't be said about the banks. The Fed has an on-going regulatory relationship with the banks that it has to manage.  And interchange just isn't a very important issue for the Fed. It's not a regulatory duty that they wanted in the least. So the Durbin Amendment rulemaking offered Bernanke (and the other Governors) a low-cost way a chance to throw the banks a bone and build up some goodwill before the gloves come off on the real fight about capital adequacy levels. 

If that's correct, I think it's a bad calculation by Bernanke et al.  The banks are going to fight on capital as ferociously as they can and $4B annually of goodwill payments aren't going to change that. And given the way the Fed did the rulemaking, I think there are a good grounds for a litigation challenge that would defeat Chevron deference. If that happens, there'll be a lot of egg on the Fed's face.