Yesterday’s post closed with the truism, “… until public policy recognizes it must alter the attitudes, thus behavior, of people to reduce poverty ….” As a recent opinion piece confirms, some Louisiana renders of opinion have a ways to go to reach this proper understanding.
The column argued for more regulation of “payday” lenders – establishments, many owned by large financial institutions, that charge high interest rates (sometimes in the hundreds of percentage points for an annual percentage rate) for small, short term loans. Predictably, the writer equates regulation of the industry to any less extent than terms that almost entirely discourage it as dereliction of the state’s duty and calls for this, as have some policy-makers (for example).
Such a view not only shows ignorance about the issue, but also betrays a lack of understanding of the nature of poverty.
In essence, it relies on the mistaken notion that people, some of whom enter into these arrangements and find themselves paying back many times the value of the loan, somehow are “victimized” by “predatory” lending practices, as if the borrowers inherently lack the intellectual capacity and judgment to make the same kinds of good decisions as do other human beings.
Looking at the statistics, the profile of a typical borrower is that of being young-to-middle age, having a slightly lower median income than average, is less likely to own his own home, and almost all have at least a high school diploma. They also tend to be bad credit risks because of a history of failure to repay previous loans in a timely fashion – justifying the relatively high rates and fees charged, also necessary because processing costs are relatively higher given small amounts and short terms, and this combination leads some portion of borrowers to become entrapped by extending loans.
Defenders of the increased regulatory regime seem to disregard entirely the behavior of these problematic borrowers when they throw around labels like “predatory.” Nobody put a gun to the heads of these people and forced them to borrow. They have enough acumen to hold jobs (a standard requirement of the lenders, unless some kind of annuity payment is involved). Free credit counseling agencies stand ready to assist them. These critics mistakenly view the system without terminal regulation to it as flawed, when in fact it is the problematic borrowers who get themselves into trouble because of their own poor judgment.
Given that behavior is not typical of human nature, for those who prize freedom it makes for a difficult argument to say government must step in so that people who seem unwilling to learn what most others have understood are protected from their own stupidity. But even if we could reconcile ourselves to such intrusive government, another reason exists to negate that involvement: to do so would deprive most users of these services they use and, in the aggregate, would make society worse off. Academic study after research study after government study has shown payday lending markets when regulated in punitive fashion, because this cuts off this source of credit, shifts their previous borrowers to inferior sources (including loan sharking) or none at all that causes deterioration of overall household wealth. State government regulating heavily in this area means to throw the baby out with the bathwater.
If government was serious about protecting those few who entrap themselves into a large debt, it would change it along the lines noted yesterday. By creating this sense of dependency through its generous anti-poverty programs with built-in perverse incentives not to change many of their clients’ habits of making poor choices, government encourages recipients to consider, then get, these loans, and, having reinforced the tendency of acting without thought to consequences, makes them more likely not to make the wise decisions necessary to pay off the loans in a timely fashion, or even to take them out in the first place.
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