I had been thinking about this since it came up recently in a local newspaper. It seems to me that they’re saying that people are financially incompetent simply because they took the high-interest loans. They don’t seem to understand that by not letting people take responsibility for their financial affairs, they are likewise denying them the right to handle their financial affairs.
In an LTE I wrote the newspaper, I stressed that these people are unable to get loans at lower rates (or obviously they would have done so), and capping the rates simply means they will get fewer or no loans at all. How are such regulations helping these people?

Now that’s an interesting point–the limits on payday loans is an attempt to restrict banking competition. In which case, we should see that the more established financial firms are vigorously supporting the payday loan restrictions. But I’ve only seen quotes from politicians and financial consumer advocates in the media.

Usury is charging interest on a loan. This is the historical definition. It is not charging too-high an interest on a loan. Just the charging of interest is usuary.

Christianity, Judaism, and Mohamidism all denounce usuary in the harshest terms. God calls it an abomination in the Bible. He says those that do it will suffer the consequences.

Predatory banking practices, just like loan sharking and organized criminal interprises, have ruined our country. When young couples can no longer acquire decent housing to raise a family, something is wrong.

What is wrong is unregulated greed. Congress is in the pockets of the bankers, trashing their Constitutional responsibilities in the process.

Ever hear of an unconscionable contract? If a man’s children are starving, he will pay any amount of ‘interest’ to feed them. It is an unconscionable and evil man (read banker) who would take advantage of that father.

Woe unto you economists acting as apolgists for the spawn of Satan. May your Libertarian ideals be damned.

Carl — (Are you serious?) Who has the right to “acquire” anything at the price he wishes? You (and everyone else) has only the right to their own property acquired justly and the products of their own labor.

And if you find a vendor that will give you a pair of the shoes today versus shoes in one week, but the pair today is more expensive to get today — can you not freely opt for the shoes now?

If so, you pay a premium for time.

And if time is then valuable, and I loan you money today to buy those shoes, what is my compensation for the time I could have those shoes but you gain?

Commonly it is called “interest”.

So banking is perfectly legitimate.

What is illegitimate is the continuous depredations of “rulers” (and the banking oligopoly or “Federal Reserve”) that violently usurps your and my rights to our own property.

And you need to read the Bible more completely. “Usury” was forbidden in the Old Testament for Israelites lending to someone in need (their brother) but not for lending to non-Israelites. There was no general prohibition.

In the New Testament charging interest is not forbidden, in fact it is welcomed (See Matthew 25:24-27 for these words of Jesus: He also who had received the one talent came forward, saying, ‘Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, so I was afraid, and I went and hid your talent in the ground. Here you have what is yours.’ But his master answered him, ‘You wicked and slothful servant! You knew that I reap where I have not sowed and gather where I scattered no seed? Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest).

Where I live there are dozens of these outfits all competing for your business. Using my vast knowledge of economic principles, which I learned mostly from watching Jerry Springer, I assume that competition has forced rates down to the point where if they were any lower, it wouldn’t make sense to be in that line of business anymore.
Indeed,some outfits went broke after posting losses.The statists should back up their good intentions with their own resources.

The big banks are getting into this business.
Recently, I had to wire $100 for a business related transaction. Due to some extenuating circumstances, I had to get the money there next day and overnight carriers wouldn’t suffice.

My bank happily wired the funds and charged me $20. Good for them and great for me. If I could do a cartwheel I would have done so walking out the door. I realize the fact pattern here is a bit different – I won’t have recurring use of this service – but it really is the same.

It’s all a matter of perspective. For my wiring needs and users of payday loans, apparently the price is right.

How about this one for all you underutilized attorneys out there. ATM fees and folks who can only pull $20 or so out of an account. Sounds like the fees are pretty usurious huh? But are they if someone really has to get at a few bucks, fees be damned. I bet some lawyer’s drafting papers already.

What social blessings? This might be a silly question, but that is how the article was titled. I know the loan people benefit (though I wonder what their default rate is), and I know the people who desire the cash early get what they want (however I would note that the inability to delay gratification is considered a vice and something corrosive to society). So I can’t find any blessing to society – not that I consider it important that society benefit (liberty even if used neutrally or even abused is more important and is in itself a social blessing, but I don’t confuse the abuses or misuses of liberty with the blessings thereof).

tz,

Liberty is the end of all political endeavor (properly understood), whence it becomes the means by which society can not only sustain itself but flourish. Thus it is a blessing due to its utility, i.e., its unique ability to benefit individiuals in voluntary cooperation with one another, this being the essence of the social enterprise and thus the key to human fulfillment.

If you write a $200 check to pay your rent which is due and don’t have the funds in the bank, the upstanding government sanctioned bank does not pay the check and charges you $30. You still face eviction and have no way to pay.

If you instead go to the userious pay day loan office and get an advance on your next pay for the $200, you must pay the absurd fee of $20 for the use of the money for 2 weeks.

Is the second alternative really all that bad? Is the government sanctioned bank really all that user friendly?

Carl,

I’m not interested what any of the religions have to say about the charging of interest, yours included. Your beliefs are worthless to me.

I’ll charge whatever interest (or fee) for the use of my property as I determine. Should I decide to borrow and pay interest I determine the value of that as well (if I do not want to pay interest I do not borrow- how simple is that?). It’s my business.

No believer of tooth fairies, monsters, dragons, gnomes, trolls, pixies at the bottom of the garden, spirits (holy or naughty) or whatever, has any right to force their childish beliefs and phobias onto anyone else. Religion is all about fraud anyway.

Roy, I know what you mean but we still do use leeches in medicine & surgery today. For example, they are useful to drain a wound site or traumatised peripheral tissue where the veins have collapsed. This can happen in an injury due to swelling. Since veins are smaller in diameter than arteries, blood can be trapped at the trauma site and not be able to drain. If the blood starts clotting then tissue dies. The poor old leech is extremely good at alleviating this problem so that swelling can be reduced and healing may talk place. Many fingers, toes, ears and other bits have been saved by using leeches!

Please don’t compare the humble (and useful) leech with useless (and harmful) religious belief. It’s a disservice to the leech.

Sione

I’m going to try to sort out the different applications of loans with interest, and where the classical condemnations of it as usury came from.

In mediaeval discussions they used allegorical rather than precise technical language, since they didn’t have the latter. They used arguments like “money cannot grow, therefore asking for growth on it is an abomination”. As a straightforward argument, the way we read it, this is nonsense. But it is a good description of what loans do in a world where agriculture is the constraint and there are no ways of increasing productivity materially. Loans could fund wars to get more land, but not to increase land – that never happened before the age of discovery (Madeira was new land that way, not taken from others).

Look at a thought experiment where farmers are offered loans to buy fertiliser, but the population – and therefore the demand for food – is nearly constant (the demand is inelastic). Here, even though there is indeed a boost in productivity, it flows through to cheaper food for the towns, not to more of it. The individual farmers nevertheless have a Tragedy of the Commons incentive to take the loans; the time preferences are real enough, but are felt individually and are themselves the consequence of wider economic effects of the loans.

The mediaeval scholars took the view that ipso facto no loan ever could make a constructive difference, simply because there were no rpoductive changes to be made in such a staic world. Any notional gains were really moving things around, so at best the contracting parties were better off at some third party’s expense. And this was near enough to an accurate description, just not a universal truth.

When world changes showed that interest bearing loans really could be productive, thinking shot to the opposite extreme and adopted the equally unrealistic view described in the post above – that since everybody wanted it, interest bearing loans were ipso facto constructive. And for a long while that was a very good general description too.

But it isn’t the truth. Certainly with regard to consumer purchases, we are getting back towards the original description. The more is lent, the more prices and needs shift so that people need loans; the interaction of individuals and aggregates is tending to create the very demand for loans.

The objectors to “usury” on this occasion are inferring it and condemning it from the fact of unusually high interest rates. Certainly, when we have separate knowledge that there is nothing constructive being funded by the loans – here, because the consequent spending is all consumption related – we cannot easily discern how that could flow through to more constructive stuff (though a proportion always does).

However, the high interest rates are not proof positive of counterproductive interest or usury. They are merely an indication. While arbitrarily preventing them will prevent usury, it will also stop any real new opportunities from flowering; those also have high returns, which draw people into the area and help develop it. So regulation is the wrong approach too.

There is another issue, how financial risk gets folded into the price of the loans. Typically, financial risk grows at a higher exponential rate than returns on the underlying activity. This often leads to foreclosing, which unsophisticated borrowers fall prey to since they lack the skills to assess the risk. A partway approach is to prevent interest being applied and rolled over as such, but to have interest free loans with the price of the loan factored in up front as a visible fee or charge. The economic effect of interest rates work out the same, but the financial risk is thrown onto the better informed lender.

There’s room for vast amounts more to be said on the subject, but as this is a blog I’d better stop there without citing detailed references. Who runs may read.

After reading this article, I’m left with the disheartening quote by attorney Mike Skotnicki.

Certainly, we all enjoy the constitutional protection of freedom of contract, but the state has decreed some contracts as unlawful or immoral, and payday loan agreements are immoral on their face.

So the Constitution protects the freedom of contract, but only when the government deems it moral. I’m sure that’s exactly what the founders had in mind when they drafted the Constitution (sarcasm intended)!

While I do think that many people who use these payday loan services are not handling their money well, there is no good argument for usary laws.

But here’s an interesting hypothetical situation: Suppose, in a moment of utter drunken foolishness, I agreed to pay someone a million dollars interest on a one hundred dollar loan. Could this contract be enforced?

I enjoyed Glen’s article – as a “dreaded” banker, I have followed the payday lending practice closely for several years. Economists won’t be surprised to hear this, but there doesn’t appear to be a direct link between the type of person using payday lending services, and their credit score. Just as many people who have good accounts, high credit scores, and alternative resources for short term “loans” are choosing to use these services as those with poor credit. Far from being the “poor starving victim”, the very nature of the contract tells us several things about the person choosing this type of transaction. They have a checking account somewhere, or they couldn’t do the transaction. They usually have a job and a residence – payday lenders often require a current paystub for this as proof. I have yet to see a “starving” person using this service. These “victims” are fully mainstreamed members of society. This shows us the transaction is far more voluntary than government entities are suggesting. Glen got this dead right – the common denominator is their time preference. I’m surprised the government doesn’t penalize the payday lender for discriminating against people without checking accounts! Further food for thought – if you don’t pay your credit card bill, you get late fees, the worst thing that can happen is that you take out bankruptcy. If you default to a payday lender (many people are using two or three at a time), you can be prosecuted for writing bad checks. You could even go to jail. Which price is higher?

Would you loan a sober guy $100 on a promise of a million a week later? I wouldn’t, not even to a stone sober Trump. Why? too much risk.

How about to a drunk? I wouldn’t do that eiter. I might however, make him a different loan. $101 – nope too low. $200 – no, too much. $150 – nope still too much. You know, $120 sounds about right and if that option doesn’t sound good to you, for $125 I’ll buy you another drink.

Payday loan outfits are if anything more moral than the chartered banks who can create money out of thin air.All their loans must be made out of
actual savings,they are not able to benefit from FRB, and the backing of the FDIC.(Ah, the wonders
of fractional reserve banking.Advice to young people pondering a career choice:Become a fractional reserve banker.Unlike other business endeavors where you have to earn your money by coming up with an actual good or service,banks can earn interest on money that came into existance without any productive effort.)

Mikey makes the point;

“Payday loan outfits are if anything more moral than the chartered banks who can create money out of thin air.All their loans must be made out of
actual savings,they are not able to benefit from FRB, and the backing of the FDIC.”

What this implies is that these outfits are lending money at a rate approximating the real opportunity cost plus a risk premium. “Regular” banks and funding sources are, conversely, subsidizing loans and are thus enticing people into excessive borrowing. When you add that to FRB and the role of the big banks in inflation via the Federal Reserve, it becomes harder to argue that any rate of interest charged by these outfits could be construed as immoral.

The willful naivete that pervades this article is amusing, but unfortunately it does not help to convince anyone that payday-loan businesses should not be punished.

There is no subtle or intelligent economic planning on the part of the borrowers. Their ignorance of economic matters should be the focus of such an article, not completely ignored or recast as the efficient workings of a moral economic system. The business in question is the loaning of money to those who don’t know any better than to pay ridiculous rates of interest.

Is it moral to take advantage of people’s ignorance? Well, I wouldn’t do it, but that doesn’t mean there should be a law against it. The real issue should be the inviolability of property and contract, not the weak assertion that the existence of payday-loan businesses are proof of an efficient economy. I would say the existence of these loan sharks is the evidence of the failed public school system that has taught the victims nothing about economic calculation!

– Dewaine

Dewaine;

Lisa makes a good point, but I will take it further – if we had a low-tax, hard money system, far fewer people would find themselves in the position to need such loans. Since inflation and taxation take so much surplus out of the economy and completely waste it, many working people find that they need to use these outfits to keep from breaking financial promises.

Return to a hard money, low-tax regime, and in time much of the demand for this service will disappear.

For now, however, the demand is apparently large and growing, and the rates, far from being exploitative, simply reflect a market interest rate plus a risk premium. This is simply an economic relationship, and is completely moral because it is completely voluntary. The high rate may outrage us, but these people borrow this money of their own free will.

Dewaine,

Now we are getting somewhere. I agree with you re: economic ignorance. The public schools have done nothing to penetrate the cone of ignorance, and never will. The line of social pathologies leading to this is long and convoluted, and repairing the problem will require a total dismantlement of the entire government-poverty-educational-financial-industrial complex, and the resurgence of private, community-based educational and financial organizations. Until then, payday loan shops will continue to find plenty of customers.

I pay $500 for a couch, which the store promises to deliver in two weeks. A week later I decide that I don’t want the couch. I agree to have that couch delivered to a used-furniture store in exchange for $100.

What would Mike Skotnicki think about the morality of that contract?

I don’t think he understands the role of money or time in market transactions.

As long as we libertarians plead for public enforcement of our ‘private’ contracts, we shall always cede to government full discretion to decide both which ‘private’ contracts we may make — and then which it shall enforce.

Tenny’s points are essentially correct — but he appears to be wholly blind to the rule-setting, enforcing and arbitrating powers we grant government. Well, blind or hypocritical . . .

A more thoughtful approach is to FIRST renounce government enforcement of our contracts and SECOND to demand the right to make contracts as we please. Otherwise his position rings entirely hollow — demanding the right to contract with anyone for anything, then, by implication, demanding that government use its awesome power to compel performance of same — regardless of egregious terms.

By giving only half the argument, Tenny comes off as little more than an apologist for those who want government out of the way when it serves their purposes — yet also expect government intervention when it suits them.

The right to contract must carry with it the corresponding recognition for potential complete loss — without resort to violent enforcement. Only when the contracting parties expose themselves — and only themselves — to the risks associated with unconscionable agreements are both parties restrained in making such agreements.

As long as we expect government to be our muscle it is THEY who shall tell US what contracts we may make and then which it shall enforce. Period.

V Harris

I thought I’d better add that when I say that it still remains speculative I want to put a qualifier on that. Its very easy to see how anarcho-capitalism could take off if first all these counties had off into independent political entitites.

If you had tens of thousands of these little ‘principalities’ (perhaps for good form mostly surrounded by razor wire) its very easy to see how some of them might work through all the problems of getting rid of government in its entirety.

From there whatever way of doing things transpires (in these county-sized anarcho-capitalist regions) could catch on, and the insurance-based policing and defense might get off the ground as Hoppe envisages.

So when I say its a speculative notion this is not to say that I don’t think its likely to be pretty viable once we get an orderly process for the secession of small areas.

I just am very doubtful that it could work or produce desirable outcomes otherwise.

Unlike private money non-exploitive private enforcement of contracts and private security doesn’t appear to occur spontaneously. When there is a breakdown what occurs instead is warlordism. And warlords will inititate compulsion for their resources.

But if we first get to this position of tens of thousands of small principalities wholly private systems not reliant on initiation of force may have a chance to develop.

I would dispute that ‘libertarian’ and ‘anarcho-capitalist’ mean the same thing.

Yeah I accept most of what you are saying here. I might have misunderstood you. I especially agree with that opening line.