Yours truly, vs. Nouriel Roubini.
Polemics on payday loans
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To misquote Roubini:
Borrowers (economists) with inadequate financial (economics) education and meager finances (brains) often fail to realize the imprudence of such loans (arguments) until it’s much too late.
“There are two kinds of people in this world” is always a good start
, but is this what surveys show?
I’d worry that there is a category of foolish people who, while not “genuinely” needing money immediately, or “desperate” for the necessities, nonetheless fall into a trap. A prepaid cellphone and a Latte now is better than one next week. (That’s they way I’ve seen it happen.)
Some will by now, not doubt, be disdaining my paternalism … but what is the flip side of paternalism? To use the poor (and foolish) as fodder for whatever scheme you have?
How many of these loans are made by lenders who suspect strongly that the applicant may not pay, but are afraid not to make the loan because they may be sued? Isn’t government responsible for that? Also, what government action in the history of the world would make anyone think that any government would know how to regulate any form of lending accurately and efficiently? Isn’t there massive evidence to the contrary in the government’s own student loan program?
Professor Cowen,
You accuse those who want to limit loans of snobbery, i.e., they believe only the credit worthy deserve loans.
On the other hand, you, and those who want no limits assume that everyone who enters these loans knows what they are doing. Having assisted a large number of young enisted members of the military and their families, I can assure you this is not true. Many of those who take out payday loans are unsophisticated and unaware of the risks they are taking. And this is because either 1) there is no effective consumer education or 2) they cannot comprehend the mechanics of the loans.
I believe that most, if not all, people on both sides of the debate will agree: if both sides fully understand what is going on, there is no problem. You tell me how to ensure this and I think that you will be well on your way to making your case.
I’d love to see another article published side by side with tat one, written by someone who searched out and found poor people who were helped by access to loans. That side of the coin is effectively always either ignored or downplayed in this type of article.
If you cut off loans to the poor via regulation, how sure are you that this will be a net positive for them as a group? How sure are you that they won’t simply become fodder for illegal loan sharks with their own collection methods?
I’m inclined to think the best remedy, albeit perhaps limited, to so-called predatory lending is to mandate clear disclosure of payments that will be made, including the relevant time frame, as well as any changes in rates that may occur for whatever reason, and finally what the effective annual interest rate is for any payments or penalties.
The problem as I see it is not that there isn’t disclosure, it is that the disclosure is in legalese and how many people simply never bother trying to read that opaque crap?
Happy,
It is very likely, if not certain, that payday loans have done some good. But, then again, some murders have done some good, too.
To me the question is whether the good outweighs the bad, or even come close.
Clear disclosure is impossible. If I told you that a loan was for 1% per day, compounded hourly, you would understand. Someone with less sophistication, however, might think that was a better deal than a loan at 4% per year with simple interest.
In any case, the cost of making sure everyone understood what was happening (assuming we could put a contract in terms that 90% of the population could understand) is prohibitive for payday loans.
Further, without changes in the law (which are pro-consumer and were written because lenders were acting in an unconscionable manner), I don’t think we can get clear contracts.
Is there anyone else out there who thinks that even doing ordinary life activities has become too complicated?
As with some many other things, The Simpsons show us the way forward.
Canyonero Salesman – “Ok, heres how your lease breaks down… this is your down payment, then here’s your monthly, annnnnnnnnd there’s your weekly.”
Homer – “And that’s it, right?”
Canyonero Salesman – “Yup… oh, then after your final monthly payment there’s the routine CBP, or (mutters almost inaudibly) Crippling Balloon Payment.”
Homer – “But that’s not for a while, right?”
Canyonero Salesman – “Right!”
Homer – “Sweet!”
I wonder why no one tries doing loans to the poor with clear, lower interest rates as a charity. Would there be legal barriers?
Let’s say you’re a part of the working poor. Because of a change in jobs, you’re going to miss one weekly paycheck which you desperately need. Your landlord is going to charge you a $75 late fee if your rent isn’t in by the 5th, and the power company is going to turn off the electricity. You will not go without electricity for one week, but for two — because if the power is shut off, the utility wants an extra $200 deposit plus a $150 reconnect fee. You have two days to come up with an extra $500, or else you face $225 in late fees plus a $200 deposit.
But wait! There’s a payday loan company willing to loan you $500 with only $50 in fees for one week, or $75 for two weeks! By taking the loan, you can pay your bills, save $150 or more in late fees, preserve your credit, avoid a $200 deposit, and continue living with electricity!
Yup. Outlaw the bastards.
OK, this surprises me:
“Proof of regular employment is required to obtain a payday loan, and lenders
also oblige borrowers to provide a pay stub. Payday borrowers are predom-
inantly middle-income. More than half of borrowers have family incomes of
between $25,000 and $49,999.23
About a quarter of payday loan borrowers earn less than $25,000, whereas
in the general population more than 30% fall into this category. Likewise,
about a quarter of payday borrowers earn more than $50,000, whereas in
the general population nearly 40% are in this category.24″
Payday Lending Fact Book (link to pdf)
That was a copy and paste from a the linked pdf. Didn’t feel the need to reformat.
Now, I think the interesting _question_ is what to do when the poor do things that reinforce their woes. It’s an age old question, and usury laws are one solution.
… but you misinterpret me if you think I am an ideologue with a prescription for the world. I’m a moderate looking for balance, and not sure where that is.
One way, without government intervention, to find balance is to call these things what they are – usually stupid – and to caution the vulnerable away from them in ‘non-emergencies’. An ideologue who defends a usually stupid practice with a cunningly designed hypothetical isn’t really helping on that.
I mean, talk to me about people making $25-50K, and going 4 times plus to the payday loan guy … sound to you like sensible personal finance?
My Mother told me not to buy into the commercialism, and that the Trader Joe’s orchid I gave here a few years ago is blooming just on time. Maybe this frugal perspective runs in the family
Anyway, I never said “outlaw” in my search for moderation. That’s a straw dog. What I’m looking for is balance, and possibly a few limits. (One might note that a tavern and a tavern-goer already face some limits, on age, levels of public intoxication, operation of vehicles, etc.)
I’m askin what will give people many options, but at the same time not contribute too far toward their decline? I think I’m asking something consistent with the history of our democracy.
I came to this thread already bored this morning … and the claim that there is an “insincere” difference between “outlaw” and “regulate” bores me the rest of the way out of this thread.
“Nothing — repeat, *Nothing*, will give people as many options as an unregulated, unrestricted market. Government can do *nothing* but restrict options.”
It’s now clear that I’m talking to an ideologue who would repeal drinking ages and public intoxication laws …
You know, recent brain theory says that we all have the capacity to be carried away by an idea. Surely there must be people in a population who feel that too strongly. There must be people who reject reality, and the complexity therein, in favor of a myth, a dream, a purity, of abstract ideology. Have fun with that.
Regulation would only mean that the poor will have to go to the underground economy to get the same loan
Mia, are you proposing an end to all banking regulation?
Yep, should have been written to Sheet.
I’m in total agreement with Burke.
Odograph has a need to absolve some guilt.
BTW – Mother loved the wounded, non-edible over priced offering.
Go figure.
S-S-S-Sorry.
Mja,
If you’re really in favor of a free market, there should be no objection to going to the underground economy (which I still argue is more transparent and probably not a whole lot more usurious than the current lending scams passing as legal).
Can’t have it both way, folks.
MJA should also be in favor of legalizing drugs.
As for Burke. I said nothing about self-defense or any other excuse. In my example, I just saw a murderer on the street, maybe eating an ice cream cone and shot him. No provocation or anything.
The question is whether we are going to have morality or moral relativism. Is murder wrong or is murder ok if the victim is a bad guy?
This is the thing in the nutshell: we have demand, we have supply, we should have a market. Can be said for a lot of things. If we can have payday loan markets, why not marijuana (it is certainly less dangerous in real and relative terms than payday loans).
Sheet,
I think we will have to call it a draw. You cannot prove your assertion and I cannot prove the negative (which I believe to be the case).
IMHO a truly free market that you imagine is a utopian ideal.
Odo -
I agree that a democracy which succeeds in providing universal opportunity to the knowledge and assets it’s citizens need to pursue happiness is a prerequisite for returning power to the individual. I feel that a democracy is a stepping stone to freedom — a necessary structure to ensure opportunity. When welfare agencies have begun advertising for clients, and schools have bent to the demands of the most miniscule minorities — I feel we’ve reached that level of opportunity. The nanny state is no longer required, it’s time to give power to the individual. And that includes the right to fail.
On this subject, I am completely in the camp of Rothbard.
Hmm from payday loans to legalized drugs. Good transition. A few points of light, rules exist for a reason – whatever that reason may be. All states require payday loan companys (finance companies) to provide full disclosure to the borrower. They may or may not understand the rules since they are often authored by government people who don’t actually speak or write english. I would agree that they should be re-scribbled so 5th grader could understand.
As for legal drugs – now that I am older married fellow an evening consist of viewing DVD’s and experimenting with expired perscriptions. NOW That’s legalized drugs mmmmmm
Enjoy – Burke
What you don’t know CAN hurt you, especially if you make important decisions based on erroneous information. The present argument concerning the pros and cons of cash advances, and what’s in store for the future of the payday loan industry is something about which you should be knowledgeable. There are politicians from every party that have approved legislation in a number of states, cities and towns that limits or prohibits your ability to get a payday loan. Some politicians are even trying to completely eliminate the payday loan industry. What the politicians don’t know can hurt you: these anti-payday loan laws are mostly established on the false concept that payday lenders have the same ethical outlook on their customers as illegal loan sharks. Now is the time to spread the good word about payday loans to those close to you in order to preserve your financial freedom.
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