Comment of the day
August 13, 2008 | industry, industry critics | Comments (2)Regular reader and commenter Jon Schultz sent this last night:
What I think is un-American is for the government to tell merchants and service providers how much they can charge for their product or service – unless, of course, they have been granted a license to make use of limited public resources in the operation of their business as have, for example, utility companies.
A lender is a service provider and as such should have a right to set its own fees and/or rate of interest in accordance with market conditions. Government regulation of loans should involve ensuring that loan offers are clear and honest, with no important details hidden in fine print, and of course that lenders strictly adhere to legal debt collection procedures. Lenders should also, in my opinion, be required to provide prospective borrowers with clear information as to what actions they may legally take in the event the borrower defaults on the loan. Beyond that, however, this is supposed to be the land of the free and the home of the brave, and lenders and borrowers should be free to deal as such. Loan interest rate caps, otherwise known as usury laws, are an authoritarian tradition which should have been abolished along with the tradition of slavery.
There are only two choices. Do we want a country in which merchants and service providers have an unabridgeable right to set their own prices in accordance with market conditions, or do we want a country in which politicians, for reasons which may not redound to the public interest, can tell every doctor, lawyer, grocer, lender, entertainer, and free-lance maid or secretary how much he or she can charge?
Comments»
It’s a little silly to say that price caps on credit are un-American because all 13 of the original states in the Union had usury statutes. In fact, until the 1980s, every single state in the nation limited the price of credit for small loans. Even now, only six states (DE, ID, NV, SD, UT, WI) don’t set price ceilings for payday loans. Apparently most of America is un-American.
The justification for maximum prices in this market is perfectly consistent with mainstream economics. The small loan market is a classic example of imperfect competition, even if there are many vendors for the product. There are also positive welfare effects in so far as price caps prevent borrowers from falling into debt traps.
Your sweeping claims are wholly ideological and represent a one-size-fits-all approach to social policy. The world is more complicated than your simple theory recognizes.
Just because something is widely done and has been done for a long time doesn’t mean it’s a good thing to do. In the old South slavery was considered normal but today we wonder how it was ever allowed.
I’m not familiar with the concept of “imperfect competition,” but it seems to me that if the free market should work well anywhere it’s in the field of small loans as so many people can enter the business with so little expertise or machinery. And as Prof. Tom Lehman pointed out in his testimony to the Ohio legislature, it is because of usury laws that banks and credit unions are not in the payday loan business, which might lower costs somewhat. Moreover, many people won’t enter the business due to critics calling payday lenders predatory loan sharks and working to shut the industry down. The usury laws and criticism are basically rooted in religious concepts, as is shown by the fact that usury originally meant the “sin” of charging any interest whatsoever on a loan. I thought we were supposed to have a separation of church and state?
It is also due to the narrow exemptions to the usury laws which some states have granted that payday lenders are generally unable to offer installment payday loans, which would be a better option for those payday loan borrowers who know they’re not going to be able to repay the full amount of their loan on payday. Usury laws are also to a large extent responsible for the existence of real loan sharking, where people who can’t obtain a legal loan because the government is trying to protect them from usurious interest rates then face violence if they don’t repay an illegal one. In seems to me that consumers would be much better served by a free market in loans with strong requirements for clear and honest disclosure and legal debt collection.
Any despot can say there are complicated reasons for abridging what should be inalienable or unabridgeable rights, but such rights are an important foundation for society. Let merchants and service providers set their own prices and let consumers decide for themselves if a clear and honest offering works for them. This does not prevent the government from helping those in need; that can be done in other ways.