Okay, so no one’s actually getting killed. But their lives are being made more difficult–in this case, legislation to “help” the poor by tightly regulating payday loan places will sharply restrict their access to short-term credit.
Are there con men out there? Sure. Do people get ripped off? No doubt. This doesn’t call for regulation, though–it says that there is money to be made as an honest payday lender. Blanket regulation that hurts honest entrepreneurs in an attempt to restrict con men does more harm than good.
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I don’t accept the conclusion (although I understand the argument) that a predominance of dishonest practices in a field creates opportunities for honest practitioners. To the contrary, in some cases, dishonest practitioners can offer lower entry prices, exacting their unjust gains somewhere later in time, perhaps when the mark attempts exit. Further, once a field acquires a reputation for sharp dealing, it becomes different for a new (honest) competitor to make credible claims that he is offering his product on honest terms.
My argument above is sometimes used as an argument in favor of regulation. I reject the notion that regulation can improve these, or any other conditions for consumers taken overall.
All laws are forms of regulation. Either you prevent the problematic acts in the first place (which tends to scorch the earth for the honest operator), or you allow the person to sue – of course you have to hire a very expensive lawyer who will charge far more than the poor person’s entire net worth – or you have some mechanism for to file what would amount to a fair bankruptcy. OK, so you charge me 60% interest – the law can say I don’t have to pay you back more than 10%, and if you try anything you violate criminal provisions.
“Honest” energy companies could not compete with Enron until their ponzi scheme collapsed. Honest S&Ls couldn’t compete with the ponzi S&Ls in the late ’80s (doing junk bonds, inflating their property loan portfolio with daisy chains…).
For that matter, the true liberty which is “sold” here can’t compete with a socialism which promises to improve everything for free, although it always proves to be an injurious lie.
In a philosophical variant of Gresham’s law, pleasant though bad thinking crowds out right reason.
It does not look like fraud is the issue here. Rather, the very existence of high interest short term lending appears to offend lawmakers. It seems irrational to take out these loans (or to rent furniture, or buy lotto tickets), but the poor folks who do so appear to have some kind of need that is being met for profit.
If it were simply a case of fraud, I don’t see why pre-existing laws wouldn’t already cover the problem and allow for prosecutions. No, it’s simply another attack on voluntary trade. They can’t imagine why anyone would willingly borrow money at what they perceive to be ridiculously high interest rates, and thus deliberately hurt the poor and the poor credit risk people who are unable to get loans at better rates.
Perhaps, like going cold turkey, it forces these people to live within their means and be fiscally responsible. Most likely though, it causes real hardship to people who are unable to live from paycheck to paycheck.
There have always been venues for high interest short term loans, and there always will be. Where such things are “illegal”, they’re called Loan Sharks.
This prohibition is no different than any other prohibition. All it will do is drive the practitioners underground and increase prices because of increased risk for the service provider.
At the same time, risks are increased for those who use the service. Rocky Balboa might be sent to “have a chat with you” if you fail to make a payment, instead of getting a letter in the mail.
Yet the emotional appeal of “doing something” for those “poor people” who get “ripped off” by these legal services is so powerful that the politicians keep gaining votes by acting in interventionist ways.
At least they haven’t shut down pawn shops yet.
A quote from TZ:
“In a philosophical variant of Gresham’s law, pleasant though bad thinking crowds out right reason.”
That is a good quote..
The payday loan industry really needs Wal-Mart to enter and cut margins. I think it is another line of business that Wal-Mart would probably love to get into, if it wouldn’t make the company look like a bunch of crooks.
By offering $3 payroll check cashing Wal-Mart is only nibbling away at this market.
These people don’t need laws, they need good credit. I don’t know if WalMart-Discover if offering credit cards to those who live paycheck to paycheck, with say 20% annual interest on cash advances. It would still cost far less than payday loan places…
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