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In Defense of Usury:

There is a brilliant column in today's Wall Street Journal by Dean Karlan and Jonathan Zinman, "In Defense of Usury". Here's an excerpt, but of course the whole thing is worth reading.

The authors note the behavioral economics critique of consumer credit use, i.e., that consumer may lack impulse control and the like. But they observe:

But even consumers making flawed decisions may be better off when they can borrow from regulated financial institutions at "excessive" rates.

Our organization, Innovations for Poverty Action, tested this proposition. We worked with a successful finance company in South Africa to randomly choose some just-below-the-normal-approval-bar applicants to receive a four-month installment loan. The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy.

We then tracked both groups over the next six to 27 months, measuring their well-being based on a range of economic, social, health and mental health measures. Applicants who were randomly approved for a loan had higher incomes, less hunger, better credit scores and more positive outlooks than their control group counterparts -- even after paying the high interest rate. Though they had higher than normal default rates, the borderline loans were also profitable for the lender.

The new borrowers did report higher stress and depression levels than the control group. But overall, the borderline loans objectively did more good than harm. Our findings are striking because governments that restrict credit access do so on the premise that consumers make themselves worse off by borrowing at high rates.

How can it be that consumers get preyed upon in the market, yet still end up better off? One possibility is that returns to borrowing swamp the cost of consumer mistakes. Rolling over payday loans repeatedly might cost you big bucks; but it can turn out to be a good deal if you need the initial loan to fix your car, hold on to your job and avoid losing even bigger bucks in after-tax earnings.

Another possibility: The alternative to being gouged by a financial institution is being gouged more expensively by an unregulated lender.

Karlan and Zinman's findings are consistent with those of Adair Morse, who found in her article, "Payday Lenders: Heroes or Villains?" that communities that allow payday lending are more resilient in responding to natural disasters in terms of the overall welfare of individuals who live there in terms of foreclosures, births, deaths, and alcohol and drug treatment.

J. F. Thomas (mail):
Is there anything libertarians won't defend if they can find the barest economic justification for it. I guess slavery had some positive benefits for the slaves too. Hey no need to worry about food, clothing, housing! And we need to relook at those pesky child labor laws, think of all the economic benefits of eight year olds hauling coal carts and operating looms!
11.1.2007 5:13pm
Unintended Consequences:
I think a lot of people, including libertarians, would be singing a different tune if they were subject to 40 percent interest rates on their credit card charges and living in perpetual indenture. Sometimes I have to think that libertarians just aren't connected to reality.
11.1.2007 5:14pm
Lively:
Here are a set of real life facts for a minimum wage family:

3 credit card payment bills due in one week with NO money in the bank:

1. credit card minimum payment of $35
2. credit card minimum payment of $35
3. credit card minimum payment of $35

Here are your choices:
1. Pay the 3 bills out of the bank account and bounce the checks. Total cost of bounced checks $120.
2. Pay the 3 bills late when you get paid next week. Total cost of credit card late fees $105.
3. Take out a $100 Payday Ln for 2 weeks. Most common interest fee that I saw was $15.

Which do you choose?
11.1.2007 5:30pm
Tim Dowling (mail):
Let us know when there's a study showing how frequently people use these to get their cars fixed.
11.1.2007 5:32pm
Dilan Esper (mail) (www):
This is a very difficult issue. The problem with the position of many consumer advocates is that the poor often need to rely on credit to make ends meet, and due to the high risks, that credit will only be provided if lenders can charge a profitable interest rate. The problem with the position of many libertarians is that this sort of high-interest borrowing can put poor people on an endless treadmill of borrowing that they never seem to be able to escape.
11.1.2007 5:33pm
TruePath (aka logicnazi) (mail) (www):
J. F. Thomas, Unintended Consequences:

The attitude you express is responsible for more suffering and economic deprivation than almost any other political philosophy. Your argument is basically 'emotionally I find this appalling' and on those grounds you refuse to consider whether it is genuinely true that high interest l0ans are a net benefit.

Now I agree there are valid reasons to be skeptical about the conclusions drawn from this study. However, there is no excuse whatsoever for being selfish and ignoring what the evidence says helps the most people because it makes you feel morally queasy. This is the same sort of reasoning that causes people to ignore the question of whether purchasing from low wage factories in china helps or hurts the workers there and boycott them based on pure emotional response.

-----

I'm dividing this comment up because the stupid spam filter here keeps telling me it contains a banned word.
11.1.2007 5:46pm
Thomas Allen (mail):
For your reading pleasure:

The Economics of Pound's Canto XLV
11.1.2007 5:46pm
TruePath (aka logicnazi) (mail) (www):
Sorry for the l33t speak but the spam filter won't let me post otherwise.

This having been said I think there are real substantive reasons to worry about the generalization of these results to the conclusion that usury isn't so problematic. Most notable is the fact that this study doesn't show what effects knowing that usurious l0ans are available will have on society.

In particular if you implemented a policy of granting these high interest l0ans you would attract a different category of borrower.. Likely the people who just needed another hit of their preferred dr*g or wanted the money for other frivolous purposes didn't bother applying for these l0ans since they knew under the standard rules that they wouldn't receive a l0an. Instead what you probably got was people with reasonable need for a l0an that happened to be bad cr3dit risks. However, by legalizing this behavior you would create an environment where the people who just need their next hit of crack would be encouraged to take advantage of it.

As far as payday l3nders go I'm inclined to believe they shouldn't be made illegal but that's because it isn't the payday lenders who are the problem. The problem is the difficulty for the economic class who uses payday l0ans to get access to cheaper financial instruments. In particular if we really had a clearinghouse that let people place liens against future paychecks you should be able to do the sort of cash advances that are sometimes needed at fairly lost risk and hence low rate. Additionally another problem is simply consumer education. Often people who cash their paychecks at places like this aren't sufficiently aware of the long term costs they are paying relative to a real bank account.

Merely making these things illegal tends to just take options away from people and can turn them to l0an sharks and other unsavory markets. What is needed is positive solutions that provide better alternatives.
11.1.2007 5:48pm
TruePath (aka logicnazi) (mail) (www):
One quick clarification.

What I was saying in my first post is simply that there is no valid role in a conversation for arguments of the form, "How could you advocate such a thing." If indeed the practice is as clearly bad as you are assuming it should be straightforward to simply meet the claimed benefits head on and refute them. On the other hand if the preponderance of the arguments tend to show that something is beneficial not amount of reflexive horror at it should override the evidence.
11.1.2007 5:55pm
Daniel San:
J.F. Thomas:Is there anything libertarians won't defend

Although some of the arguments may strike you as odd, have you ever noticed the common thread that libertarians tend to advocate liberty?
11.1.2007 6:01pm
Waldensian (mail):
The people who are undertaking these high interest obligations are adults. I say let them, and the institutions who want to cater to them, work out whatever arrangements they want. Paternalism toward the poor is an odious business.

What the F is up with the spam filter?
11.1.2007 6:17pm
Earnest Iconoclast (mail) (www):
Um... if you're going to make posts like this, you might consider editing your blacklist...

And the more liberty solution actually seems to make people better off. Go figure!

For the record, my initial reaction to these kinds of places is that they are harmful and shouldn't be permitted... but if empirical evidence says otherwise, I'm not too stubborn to give up my initial reaction.

EI
11.1.2007 6:19pm
r78:
Isn't slavery economically efficient as well?
11.1.2007 6:28pm
David Chesler (mail) (www):
So people who weren't so careful what they wished for, and got what they requested, were better off than people who were told "No, I know better, that's bad for you". This is news? (Sadly, only in libertaria wouldn't it be news.)
11.1.2007 6:31pm
vi:
This is bizarre.

Not all arguments against usury are utilitarian. To my mind, the arguments against usury are Kantian. So any arguments about utility are awkward to me.
11.1.2007 6:32pm
Steve:
You can prove anything by looking at the margin.

However, since this industry does not cater solely to the margin, you might need to look a little deeper.
11.1.2007 6:33pm
Jon Rowe (mail) (www):
Credit Card companies and payday lenders are snakes. But that's the price of the free market. People have to exercise some self control and be less Homer Simpsonish in dealing with these entities. And if they don't it's their responsibility for why they keep making money but can't save.
11.1.2007 6:34pm
Dick King:
Slavery is not economically efficient because it ignores huge negative utilities on the part of the slaves.

We know that the owner/slave relationship has negative utility for the slave because if it didn't, the owner would simply hire the otherwise-would-be slave on the same terms.

-dk
11.1.2007 6:35pm
psychdoc (mail):
Actually, it's far from clear that slavery is economically efficient. The lack of workers' incentives certainly decreases productivity.
11.1.2007 6:38pm
PLR:
But even consumers making flawed decisions may be better off when they can borrow from regulated financial institutions at "excessive" rates.

Duly noted.

What was the brilliant part of the column, exactly?
11.1.2007 6:58pm
Steven Jens (mail) (www):
TruePath makes a good point, I think -- that there's a difference between allowing someone to borrow at high interest once and allowing someone to continuously borrow at high interest. But the Morse research sounds more convincing (I haven't looked at it, just at Zywicki's description).
11.1.2007 7:04pm
Arkady:
Just curious. Don't the resetting ARMs, and the consequences thereof, militate against the hypothesis?
11.1.2007 7:09pm
hattio1:
Did anybody notice that the normal !nterest rate was 200 percent and these people were still below the cut-off. How exactly does this prove that people are better off if you allow high !nterest l0ans. It seems to show that in areas where high-!nterest l0ans are already available, the persons who normally couldn't get them would be better off if they could. It doesn't say that the, much greater set, of people who couldnt' get l0ans w/out high 1nterest l0ans would be better off.
11.1.2007 7:17pm
hattio1:
And let me echo other commentaters. The spam filter needs to be toned down a bit.
11.1.2007 7:18pm
HappyConservative:

What was the brilliant part of the column, exactly?


Good point. If this is Zywicki's idea of brilliant, you have to wonder if he is very smart himself.

Gushing praise aside, the only problem I have with this study is the separation of "objective" well-being with subjective well-being. How does one weigh the costs of higher stress and depression? These are objectively existent and very serious problems, even if they are not counted because they are subjective. Any study that does not give these problems due weight is worthless, not brilliant, objectively speaking.

I don't feel sorry for these borrowers. They should take personal responsibility for their actions. They deserve to be stressed and depressed for making stupid decisions. It is a good lesson for life. But I am not going to pretend that making stupid decisions that result in stress and depression is a good thing, like the "brilliant" Zywicki.
11.1.2007 7:18pm
Adam J:
I'm curious, does this study consider how many in the control group used unregulated l3nders? If most of it did, all it might show is that being gouged by a financial institution is not as bad as being gouged by an unregulated l3nder- which I think we all intuitively knew to be true. Perhaps members of the control group who didn't recieve any l0an at all did better then the new borrowers, however so many of the control group got unregulated l0ans that the results are skewed in favor of the new borrowers. Of course that's speculating, but I think any study is flawed if it fails to make sure the control group doesn't borrow.
11.1.2007 7:21pm
MarkField (mail):

have you ever noticed the common thread that libertarians tend to advocate liberty?


Actually, no. What I've noticed is that libertarians tend to advocate positions which ignore the real world and to claim that they advocate liberty.
11.1.2007 7:34pm
titus32:
HappyConservative: the main justification for restrictions on credit access is that the credit is not in the borrower's financial interest. To the extent that this study shows otherwise, it is certainly not "worthless", even if it does not attempt to quantify the costs of depression. Otherwise, I suppose brilliance is in the eye of the beholder, although your insult comes off as puerile.
11.1.2007 7:36pm
BobDoyle (mail):
What's with the bogus slavery argument? Slaves are coerced to provide their labor. Nobody forces people to borrow at any rate, usurious or otherwise. Why do some people think that their sense of "fairness" or whatever should trump all and give them an overriding right to prevent other people from exercising their rights to contract mutually agreeable terms to a lending transaction? What incredible hubris and condescension all too familiar with the do-good totalitarians throughout all of history.
11.1.2007 7:42pm
HappyConservative:
titus32,

When a study does not fully weigh the costs as well as the benefits, we should not be surprised when the study concludes that the benefits exceed the costs. And such a conclusion is worthless. Absolutely worthless. Not brilliant; but worthless.

This reminds me of Voltaire's Candide.<i>Tout est pour le mieux dans le meilleur des mondes possibles.</i>
11.1.2007 7:44pm
HappyConservative:
BobDoyle,

What makes you think you have a right to make contracts in the first place? What makes you think you have a right to coerce others through the force of government if they do not keep their promises to you?

Guess what. Morality is what binds us together as a society. The same morality that justifies enforcing a contract justifies outlawing usury.

But libertarian scum, unlike conservatives, mock morality, don't you. From a conservative perspective, which is worse, liberal scum or libertarian scum? I can't decide.
11.1.2007 7:48pm
Arkady:
Of course, the logical conclusion of the
libertarian position is the slavery contract
(See Nozick, ASU, page 331). And why not?
11.1.2007 7:50pm
HappyConservative:
Arkady,

I will tell you why not. Because slavery, like usury, is immoral.

I do not think we should ban usury so much as to protect irresponsible borrowers as to rein in greedy and immoral lenders.
11.1.2007 7:52pm
HappyConservative:
Here is a relevant quote that concisely expresses why this "brilliant" study is worthless.


Not everything that can be counted counts, and not everything that counts can be counted.


-Albert Einstein

And that is from someone who truly is brilliant, not merely "brilliant."
11.1.2007 7:56pm
Bottomfish (mail):
In the experiment with Innovations for Poverty Action, the below-normal applicants who were approved are described as "just below the normal approval bar." One way to interpret the results: the finance company's approval bar was too high anyway. How low should we go in looking at credit histories? And just how do we evaluate them? (Concerning the spam filter: the dirty word is l**ns)
11.1.2007 7:58pm
BGates:
What makes you think you have a right to coerce others through the force of government if they do not keep their promises to you?
It's implicit (and quite often explicit) in the promise they made to me, and I to them.
From a conservative perspective, which is worse, liberal scum or libertarian scum?
I'm going to suggest that at least half of 'HappyConservative' doesn't mean what you think it means.

MarkField, what about this post is 'ignoring reality'?

And saving JF Thomas for last -
I guess slavery had some positive benefits for the slaves too. Hey no need to worry about food, clothing, housing!

Throw in no need to worry about medical care and have the fruits of labor confiscated by the state instead of a private actor and we'd have the economics system you're always arguing for.
11.1.2007 8:02pm
HappyConservative:
<blockquote>
It's implicit (and quite often explicit) in the promise they made to me, and I to them.
</blockquote>

Who cares if they implicitly or explicitly authorized coercion? That does not give society any reason to use coercion on your behalf any more than if they had authorized slavery.

The reason contracts should be enforced is only this: because it is generally immoral to break your promises. Period. For the same reason, usury should be banned.
11.1.2007 8:04pm
HappyConservative:
BGates,

Get this, if there was no moral problem with breaking promises, then there would be no problem with the person you making a promise with you breaking an implicit or explicit promise to allow you to coerce them if they break their promise. Duh!
11.1.2007 8:06pm
Arkady:

"I will tell you why not. Because slavery, like usury, is immoral."

In the libertarian universe, coerced slavery is immoral, but
if I willing sell myself to you in perpetuity, this kind of slavery
is sanctioned (at least by Nozick). Willing seller, willing
buyer. The moral foundation of the libertarian is free agency,
as they understand it.
11.1.2007 8:10pm
Davide:
HappyConservative:
You claim that "[t]he reasons contracts should be enforced is only this: because it is generally immoral to break your promises. Period."

Really? Someone signs an employment contract to work for 1 yr for $10,000 and then, mid-year, gets a better job for $100,000. Is it immoral for her to quit the old job and pay damages of $5,000 for the undone year and move to the high paying job? Or is it more "moral" of her to stay at the old low-paying job?

As you calculate the morality of the situation, what if the woman had a family to feed and wasn't able to do so at $10,000 a year under job 1?
11.1.2007 8:12pm
HappyConservative:
Davide,

Someone who has paid damages has fulfilled their moral obligation.
11.1.2007 8:14pm
HappyConservative:
Arkady,


In the libertarian universe, coerced slavery is immoral, but
if I willing sell myself to you in perpetuity, this kind of slavery is sanctioned (at least by Nozick). Willing seller, willing buyer. The moral foundation of the libertarian is free agency, as they understand it.


To the extent you are correct about libertarians, they are as bad, or worse, than liberals.
11.1.2007 8:16pm
KevinQ (mail) (www):
Lively said:
Here are your choices:
1. Pay the 3 bills out of the bank account and bounce the checks. Total cost of bounced checks $120.
2. Pay the 3 bills late when you get paid next week. Total cost of credit card late fees $105.
3. Take out a $100 Payday Ln for 2 weeks. Most common interest fee that I saw was $15.

Which do you choose?


I take this to be a defense of payday 1oans. And it might be, but it's still a far cry from the experimental model used in the article. Paying $15 on a $100 1oan in a charge of 15% (on top of any penalty fees for missed payments). That's on a two-week loan. Stretched over a year, that's at least a 375% !nterest rate (I can't figure out the compounding), nearly double what was tested in this study.

High-!nterest 1oans in a controlled environment is a far cry from the reality of payday l0ans.

K
11.1.2007 8:17pm
Laura S.:

Credit Card companies and payday lenders are snakes.


If you rollback history 50 years, you'll see a world where credit cards were rare. In a small-town a shop keeper might offer you credit, but certainly not in a big city. So, I pose this question to you, why do people carry debt on their CCs?

It's a choice.
11.1.2007 8:19pm
HappyConservative:
KevinQ,


still a far cry from the experimental model used in the article


Which is such a flawed model, that it is useless.
11.1.2007 8:19pm
HappyConservative:
Laura S,


It's a choice.


So is prostitution. So is doing heroine. So is suicide.

That it is a choice does not make it right.
11.1.2007 8:21pm
MarkField (mail):

MarkField, what about this post is 'ignoring reality'?


I was responding to a general claim for libertarians, not this specific post. Libertarians, unlike conservatives in general and unlike liberals in general, get their views out of a philosophy rather than out of their life experience. That philosophy then tells them what the world is like instead of vice versa. They are, truly, the mirror image of Marxists.

But since you asked, there's a great deal of historical evidence on the problems caused by usury (among them, the eventual rebellion of the "peasants" forced to pay those rates). Among the flaws in this study are (1) it assumes the right of the state to exercise coercion in these cases (as happyconservative has pointed out); and (2) it fails to consider solutions (or at least mitigations) to the problem of poverty, instead suggesting a system which, on its face, locks the poor further in. The fact that some managed to beat the house this time hardly guarantees that the wheel will spin in their favor the next time, or the next time, or the time after that.
11.1.2007 8:22pm
HappyConservative:

it fails to consider solutions (or at least mitigations) to the problem of poverty


Poverty is not a problem. Poverty is the result of people not taking personal responsibility. Not only that, economic inequality is necessary to establish hierarchy that is critical to smooth and natural human relations.
11.1.2007 8:27pm
Bottomfish (mail):
I take it most people who are against usury are not against all moneylending. They ought to define how or at what point moneylending becomes usury.
11.1.2007 8:33pm
HappyConservative:

They ought to define how or at what point moneylending becomes usury.


*yawn*

I will tell you what level of interest is usury when you explain to me why the speed limit on the road near my house is 45 mph instead of 46 mph or 47 mph.

Then justify why the age of consent is (hypothetically) 16 for sex. Why not 15-and-a-half? Why not 14? Not not 13? Why not 12? Why not 11? And so on.

This argument you are pointing against rules is a tired and intellectually boring one. Yes, the precise cut off between usury and non-usury is likely to contain some arbitrariness. So what?
11.1.2007 8:49pm
David M. Nieporent (www):
Is there anything libertarians won't defend if they can find the barest economic justification for it.
Is there any topic you have any intelligent thing to say about? Is there any basis for claiming that Karlan and Zinman are libertarians? And "It makes people better off" seems like a pretty strong justification, not a "bare" one.
I guess slavery had some positive benefits for the slaves too.
I guess it didn't, or they wouldn't have needed to have been enslaved; they'd have voluntarily chosen the situations. Duh.

The bankrupt (pun intended) position of the anti-payday lending crowd should be obvious: if people could get l0ans at better rates, they would -- unless, of course, you just think that these people are too stupid to figure out that a lower interest rate is better than a higher interest rate. So banning high rate l0ans means they can't get l0ans. And if they need l0ans, denying them l0ans makes them worse off, not better off.

So your only choices are (a) to say that one hates capitalism so much that one would rather the poor suffer than that other people benefit, or (b) to say that one is smarter than these people so one thinks one have the right to make decisions for them. Neither position sounds particularly attractive. At least not to me.


Gushing praise aside, the only problem I have with this study is the separation of "objective" well-being with subjective well-being. How does one weigh the costs of higher stress and depression?
One doesn't. Since these people are adults, one lets those people weigh it for themselves, because different people have different utility functions, and it makes no sense for a bunch of busybodies to apply a one-size-fits-all solution.
11.1.2007 8:51pm
Adam J:
HappyConservative- "Poverty is not a problem. Poverty is the result of people not taking personal responsibility. Not only that, economic inequality is necessary to establish hierarchy that is critical to smooth and natural human relations." Gee, maybe you should have grown up in South Africa if you're that ignorant... I'm sure you wouldn't be in poverty though, since it's just about personal responsibility. If you truly feel that way, you probably don't appreciate the advantages of the US, where most people do have opportunity to excel.
The irony of your statement is that poverty can only be(solely) the result of people not taking responsibility in a place where all people start begin in a position of social (and intellectual for that matter) equality.
11.1.2007 9:10pm
HappyConservative:

One doesn't. Since these people are adults, one lets those people weigh it for themselves, because different people have different utility functions, and it makes no sense for a bunch of busybodies to apply a one-size-fits-all solution.


Okay.

But, I should note that your formulation makes the study worthless. Which was my point all along. Your formulation is an admission that one cannot say that allowing 200% interest rates is beneficial. So, even from your utilitarian perspective, your study is useless.


"It makes people better off" seems like a pretty strong justification, not a "bare" one.


How can the study say that 200% interest makes people better off? The study admits that people can be irrational.

By the way, the idea that individuals can correctly calculate the costs of depression and stress for themselves is false, at least for many individuals. Rational people would realize that borrowing in the past is a sunk cost, and thus not worth stressing or getting depressed about. So, your idea of not instituting rules to allow irrational people to calculate these costs on their own is completely flawed.


I guess it didn't, or they wouldn't have needed to have been enslaved; they'd have voluntarily chosen the situations. Duh.


But slavery did have some benefits. Just like prison has some benefits for prisoners. Finally, people do not voluntarily choose the most beneficial position, because they do not know what that is. There is a fork in the road, you make a decision, and you hope for the best. That is about it. The reason to protect that decision is morality, not because we think the individual is necessarily really going to make the most beneficial decision.


So your only choices are (a) to say that one hates capitalism so much that one would rather the poor suffer than that other people benefit, or (b) to say that one is smarter than these people so one thinks one have the right to make decisions for them. Neither position sounds particularly attractive. At least not to me.


Or there is (3). Grow some balls. Realize that it is not moral to charge 200% interest rates and throw people who do so in prison and throw away the key.

I don't suppose morality is an attractive position for you, but it is for the rest of society, you feckless libertarian.
11.1.2007 9:11pm
HappyConservative:
Adam J,

I did not say that all problems or misfortunes are the result of not taking personal responsibility. Go attack some other straw man.
11.1.2007 9:13pm
HappyConservative:
Adam J,

By the way, the problem with S Africa was not hierarchy and inequality, which are good things. The problem was that hierarchy and inequality were explicitly racial.
11.1.2007 9:17pm
AnonLawStudent:
HappyConserviative @6:48

The "right" to enter into agreements that are legally enforceable by the state, i.e. contracts, is derivative of what a State (big S) is. In the state (little S) of nature, I have the power to enter into an agreement with another person, X, on any mutually agreeable terms. If X breaks that agreement, I can attempt to enforce its terms by the sword; the converse is also true. A libertarian views the State as merely a partial transfer of sovereignty which provides for the common protection and reduces the transaction costs of interactions, e.g. by enforcing property rights without individual recourse to violence. As a person with free will, I have the right to enter into agreements with other persons of free will; the decision not to enforce those agreements was never part of the sovereignty surrendered to the State. Morality never enters the picture.
11.1.2007 9:19pm
Waldensian (mail):

So is prostitution. So is doing heroine. So is suicide.


But of course prostitution, drug use, and suicide should all be legal.

Was that a typo or a missing definite article? I.e., if you mean "doing A heroine," that should be legal too, assuming the heroine consents, etc.
11.1.2007 9:21pm
HappyConservative:

In the state (little S) of nature, I have the power to enter into an agreement with another person, X, on any mutually agreeable terms. If X breaks that agreement, I can attempt to enforce its terms by the sword; the converse is also true.


In a state of nature without morality, you have the power to use your sword to take anything you want from X without even bothering to enter into an agreement with him in the first place.
11.1.2007 9:22pm
HappyConservative:
Waldensian,

Only a feckless individual would think that all these immoral actions should be legal. Welcome to the libertarian world of anti-morality.
11.1.2007 9:24pm
AnonLawStudent:
That's true of any sovereign; the question is am I willing to put my life in play over the property. Surrender of sovereignty to the State merely takes that issue out of the equation.

Why don't modern States simply take what they want? Morality figures into the picture to a certain degree, but the reality is that the cost of victory and risk of utter defeat don't make it worth it. To see how the idea plays out in the real world, talk to the Arabs re: Israel. The Arabs put their sovereign nuts on the line trying to take some land; they lost big time, including land of their own, not to mention several armies.
11.1.2007 9:28pm
AnonLawStudent:
HappyConservative:

I would also point out that most libertarians aren't lacking in morality. They just don't want to be coerced by someone else's morality as enforced by the State. And, btw, isn't economic coercion part of your objection to high-interest loans? Or are some types of coercion ok, but not others?
11.1.2007 9:32pm
HappyConservative:
Compare


Morality never enters the picture.


with


Morality figures into the picture to a certain degree...


That was a fast concession.
11.1.2007 9:33pm
Jon Rowe (mail) (www):
Realize that it is not moral to charge 200% interest rates and throw people who do so in prison and throw away the key.

Life imprisonment for usury? That seems a bit harsh. How about the courts not enforcing the debt?

What worked fine (not sure how the new law affects this) was letting folks who borrow over their head declare Bankruptcy.
11.1.2007 9:34pm
Armen (mail) (www):
As a person with free will, I have the right to enter into agreements with other persons of free will; the decision not to enforce those agreements was never part of the sovereignty surrendered to the State. Morality never enters the picture

Which is why we still enforce racial covenants, a contract with a hit man, etc. Please retake First Year contracts, or reread Happy's point about libertarians getting their worldview from an ideology rather than vice versa.
11.1.2007 9:37pm
Adam J:
Happy Conservative- I didn't attack a straw man, I attacked your statement- "Poverty is not a problem. Poverty is the result of people not taking personal responsibility." Newsflash by the way, apartheid is over, so it's unclear how you can rely on "the problem with S Africa was not hierarchy and inequality [you're the first person I've ever heard to say hierarchy and inequality is good by the way], which are good things. The problem was that hierarchy and inequality were explicitly racial." Nor does it explain the rampant poverty in all of subsahara africa- of course under your crazy theory poverty is always because people fail to take personal responsibility.
11.1.2007 9:37pm
HappyConservative:

I would also point out that most libertarians aren't lacking in morality. They just don't want to be coerced by someone else's morality as enforced by the State.


Well, that is too bad. Because contract enforcement is all about being coerced by someone else's morality.


And, btw, isn't economic coercion part of your objection to high-interest loans? Or are some types of coercion ok, but not others?


It is not so much the coercion that I object to. It is the predatory nature of the relationship. When you charge 200% interest, we are not talking about a sincere interest in teaching someone else the value of personal responsibility. We are talking about an anti-communitarian desire to take advantage of what you know to be someone's misfortune.

And to answer your other question. Yes, some types of coercion are okay. Some types of coercion are not.
11.1.2007 9:39pm
HappyConservative:

Nor does it explain the rampant poverty in all of subsahara africa- of course under your crazy theory poverty is always because people fail to take personal responsibility.


I wouldn't say it is always the result of a failure to take personal responsibility. I would just say that is generally the case in the United States. I was implicitly thinking of a particular context.

As far as S Africa post-apartheid, I would say the major problem is the failure of the ANC government to control crime is the problem. Before the ANC, the government was able to control crime. And if anything, the inequality was more pronounced.
11.1.2007 9:42pm
AnonLawStudent:
Armen,

Please reread Chapter 1, First Year Contracts. Or does Boalt Hall not teach the difference between elementary contract theory and the legal positivism of the Warren and Burger Courts? (Which frequently applied the source of law more commonly known as "pulled out of my all-knowing fanny." See, e.g., Roe.)
11.1.2007 9:43pm
AnonLawStudent:
Happy Conservative,

There is no coercion in enforcing a contract. The parties freely entered the agreement, it's merely that the decision is generally irrevokable. As Armen so aptly stated, try reading a little first year contracts. Courts won't enforce a coerced agreement. And no, economic disparity isn't coercion.
11.1.2007 9:47pm
David M. Nieporent (www):
So is prostitution. So is doing heroine. So is suicide.

That it is a choice does not make it right.
Sure it does. Except for your choice of how to spell heroin.

But since you asked, there's a great deal of historical evidence on the problems caused by usury (among them, the eventual rebellion of the "peasants" forced to pay those rates).
None of which applies to this situation, since we have bankruptcy laws in the U.S., giving people an ultimate 'out.'
11.1.2007 9:51pm
Adam J:
HappyConservative- "I wouldn't say it is always the result of a failure to take personal responsibility. I would just say that is generally the case in the United States. I was implicitly thinking of a particular context." The wrong context- note the topic of this thread is a study in South Africa.
11.1.2007 9:54pm
byomtov (mail):
Grrr.

Please fix the spam filter. I'm not selling drugs or taking bets, just trying to post a comment.
11.1.2007 9:57pm
David M. Nieporent (www):
feckless
That word doesn't mean what you think it means.
11.1.2007 10:03pm
JBL:
A couple of points and a question.

1. Calling payday lending immoral is usually done on the basis that the payday lenders are exploiting helpless people for excessive profit. Whether or not payday lending institutions are in fact that much more profitable than other companies is an empirical question. They're usually not. So that argument is moot. As to whether the borrowers are helpless, many of them already qualify for more traditional financing, and many more would with a little effort. Payday lending may be a bad idea, and it may be that there are negative externalities we need to address, but it isn't really exploitation unless all profit is exploitation.

2. I believe that in most cases payday advances are a bad idea. There's not really a moral component to that belief either. In the long run they are probably an inefficient tool to address the problem they are supposed to address. Banning payday lending doesn't address those problems either. Which brings me to the most important point.

3. One of my personal guidelines is that I should never criticize anything unless I am prepared to present and work towards a better idea. If you think that payday lending should not be an option, that's great - what are you suggesting we do instead? Should those who want such products simply be denied the opportunity? Is that because getting access to small amounts of short-term credit is inherently bad, and if so why, or is there a better way to provide it? Or is it that they don't need short-term credit, but they do need something else? If so, what is it and what are you doing to provide it?
11.1.2007 10:45pm
HappyConservative:

That word doesn't mean what you think it means.


Yes it does.
11.1.2007 10:54pm
HappyConservative:

Payday lending may be a bad idea, and it may be that there are negative externalities we need to address, but it isn't really exploitation unless all profit is exploitation.


Using this lame logic, you could justify anything.

Having sex with an 11-year old who has gone through puberty is not immoral, unless all sex is immoral.

Going 125 miles per hour in a school zone is not immoral, unless all driving in school zones at any speed is immoral.

Enforcing contracts against 5-year olds is not immoral, unless enforcing any contract is immoral.

Magnitude matters. Duh. It is not profit that is immoral. It is excessive profit at the expense of those who are in a bad position that is immoral.


There's not really a moral component to that belief either.


My, libertarians self-righteously straining to insist that their beliefs have no moral component is amusing. Perhaps you should self-righteous smite anyone who has any opinions whatsoever based on morality.


If you think that payday lending should not be an option, that's great - what are you suggesting we do instead?


Here is a one word alternative for you. Charity. Or government loan/subsidy that requires one to examine the lapses in personal responsibility that lead to the desperate situation in the first place.

But really, the idea that you always must have an alternative is ridiculous.

How about if I said:


If you think that murder should not be an option, that's great - what are you suggesting we do instead?


Absurd?

Well, so is the idea that one must always present an alternative to an inherently bad idea.


Should those who want such products simply be denied the opportunity?


First, let us put "opportunity" in quotes where it belongs. And the answer is yes, they should be "denied" the "opportunity" of being exploited.
11.1.2007 11:06pm
TMac (mail):
Isn't using a credit card the same thing as payday lending?
11.1.2007 11:13pm
HappyConservative:

The wrong context- note the topic of this thread is a study in South Africa.


That is not the only "topic" of this thread. The second study referenced, by Karlan and Zinman, refers to payday lending in the United States. Furthermore, it is a natural assumption that Zywicki is using the South African study to suggest that we consider whether or not there should be limits on usury in any country, including in the United States. This is indicated by the reference to the United States study, Zywicki's status as a United States citizen and a law professor whose primary focus is on American law, as well as the general title of the post "In Defense of Usury." The title is not "In Defense of Usury in the Context of South Africa" it is "In Defense of Usury."

And whether or not you think that my particular mental reference is "correct" or not strikes me as irrelevant. Who are you to say what mental reference one should have. What is important is that these mental references become explicit when there is a misunderstanding.

Thinking of things from your perspective, I suppose it was natural for you to attribute my point about irresponsibility to the S Africa subjects of this study. And I would tend to agree that this is perhaps not a fair attribution, given my general ignorance of the specific circumstances that exist in that country. It is difficult to say that individuals who have faced explicit racism are at fault for their own miserable financial situation.

But this is nothing more than a miscommunication based on the different contexts that we had in our minds with reference to my comments. In my view, both sets of references are reasonable and the important thing is that they are made explicit so as to avoid undue misunderstanding.
11.1.2007 11:20pm
HappyConservative:

Isn't using a credit card the same thing as payday lending?



No.

The thing is, it is not payday lending per se that is problematic. It is exploitive payday lending. Likewise, it is possible to have credit cards with exploitive interest rates.
11.1.2007 11:23pm
ReaderY:
Relying on this sort of study is a bit like offering people cigarrettes, interviewing them afterwards, and then reporting that they had a pleasurable experience, and then claiming to have science on ones side and arguing that all opposition to tobacco is unscientific nonsense and bunk. There's no long-term follow-up suffficient even to detect the phenomenon of dependency, let alone to detect the long-term effects of that dependency on life expectancy and other measures of long-term health and well-being. Such studies don't address opponents' clains in any serious way.

Big Tobacco has being these sorts of "scientific" studies for years. It was inevitable other industries would learn from their techniques. You'll find we're not as easily fooled as we used to be.
11.2.2007 1:06am
Kenny (mail):
To beat a dead horse on the macroeconomic benefits of slavery:

Frederick Douglas in his autobiography marveled at how much richer Hartford (or maybe it was Bridgeport), a second tier northern city, was compared to Baltimore, a first tier Southern city. While this may have been "abolitionist propaganda," it is obvious the north won due to superior economic resources.
11.2.2007 4:03am
BGates:
"If this is Zywicki's idea of brilliant, you have to wonder if he is very smart himself."
"They deserve to be stressed and depressed for making stupid decisions."
"And such a conclusion is worthless. Absolutely worthless. Not brilliant; but worthless."
"Duh!"
"This argument you are pointing against rules is a tired and intellectually boring one."
"Grow some balls."
"I don't suppose morality is an attractive position for you, but it is for the rest of society, you feckless libertarian."
Suppose you wanted to come across as an ass. How would you write any of those sentences differently?
11.2.2007 4:59am
HappyConservative:
BGates,

First, note that you never addressed the following point:


Get this, if there was no moral problem with breaking promises, then there would be no problem with the person making a promise with you breaking an implicit or explicit promise to allow you to coerce them if they break their promise.


I take it that your ad hominen attack is an indication that you have no substantive response.

Second, I should note that you are quite a vicious fellow:


I'm going to suggest that at least half of 'HappyConservative' doesn't mean what you think it means.


Your viciousness notwithstanding, you choose to lecture others on proper etiquette. Go figure.
11.2.2007 5:17am
David M. Nieporent (www):
It is not so much the coercion that I object to. It is the predatory nature of the relationship. When you charge 200% interest, we are not talking about a sincere interest in teaching someone else the value of personal responsibility. We are talking about an anti-communitarian desire to take advantage of what you know to be someone's misfortune.
No, we're not. We're talking about extremely high-risk l0ans. If people aren't compensated for that risk, they're not going to make the l0an, because they can find a better use for that money; we know that by the fact that nobody is making l0ans to them at better rates. There is nothing 'predatory' about a voluntary transaction, and it's not "exploiting" someone to refuse to lose money when doing business with them.

And there is nothing 'moral' about making people suffer to avoid offending your tender sensibilities. Nobody is forcing these l0ans on them.

To put it in simpler terms for you: these people think that getting money makes them better off. Not being in their shoes -- let alone knowing the specific facts and circumstances they face -- you don't have any basis for contradicting that belief. This is by definition the best option they have for getting money; if it weren't -- if lower-interest l0ans were available, and/or if "charity" were available -- they'd chose one of those options instead.
11.2.2007 7:22am
markm (mail):
Contracts are simply a means of using state power to enforce promises, and you do not need to invoke "morality" to explain why it's a good idea to keep promises. You keep promises because if people expect you won't keep them, you will be excluded from many opportunities and greatly inconvenienced in most activities. Without a climate of trust, everyone is scr**ed. Imagine trying to buy groceries when the grocer suspects you're just going to grab a package of porterhouse steaks and dash for the door, and you suspect the grocer will keep your money and throw you out empty-handed.

In the 19th century some apartments were fitted with coin-operated meters for gas lighting; this required the residents to pay in advance, and cut the lights off when the balance hit zero. It's a whole lot easier nowadays when the power company can trust most of us to pay a monthly bill, but even the coin-operated meters required the users to trust the lighting company to deliver after it received the cash.

The normal means of enforcing everyday contracts is not to sue for nonperformance but simply to cut a nonperformer off until they make good. E.g., if you were using a coin-operated meter and the gas did not come on after you fed in a coin, you wouldn't put any more money into it until it was working properly. Or in the modern arrangements, if you stop paying your power bill, eventually they'll disconnect your meters and your lights will go out...

If cutting someone off doesn't work (as when they cannot pay or have switched suppliers), it is common for businessmen to simply file a credit report and write off the bad debt rather than taking on the expense and aggravation of legal processes, but having the courts available for dealing with the worst contract breakers gives everyone much more confidence in a system that depends on people keeping their promises.
11.2.2007 10:06am
markm (mail):
As for "selling yourself into slavery" by contract, forms of that happen every day. Two of my uncles financed their medical educations by contracting with a military service to serve as a doctor in that service for a set period after getting their license. One served out his time in the Air Force and went into private practice, the other was a Navy captain and commander of a hospital when he retired. I made two similar contracts with the Air Force; the first one got me training as an electronics technician in return for four years of service, and in the second I signed up for six more years and received tuition plus a salary to complete an engineering degree. I certainly benefitted from these deals, and I think my uncles did, too.
11.2.2007 10:17am
Feckletarian:
I'm not a social scientist, but shouldn't the SA study have included a control group just above the approval bar, so we could distinguish what every debtor experiences from what the study group did? Is it just impossible that the approval cutoff was set where it is based on some experience of factors that demonstrate different behaviors on either side of the line?

HappyCon -

Realize that it is not moral to charge 200% interest rates and throw people who do so in prison and throw away the key.

Is it moral for a CEO to make 200x more than one of her employees? If so, what's the difference about their greed?


Get this, if there was no moral problem with breaking promises, then there would be no problem with the person making a promise with you breaking an implicit or explicit promise to allow you to coerce them if they break their promise.

There is A problem - it's a market problem, not a moral one. It's inefficient to have contracts that can't be enforced, so we all get together as a society and give some of our liberty to the state.

You remind me a lot of the people who don't trust athiests because you can't imagine any reason to behave well other than your view of eternal punishment.
11.2.2007 10:30am
BobDoyle (mail):
Why does anyone bother responding to HC?

He spews invectives and ad hominems, uses as argument HIS sense of morality rather than reason, and then assumes, without any rationale other than, ostensibly, his own aggrandized self-righteousness, that he or the state or whomever has the right to impose HIS morality to circumscribe transactions that are freely chosen and mutually agreed upon by others. And, by the way, if you do not agree with him, you are "scum." A perfect example of the busybody, do-good totalitarian who is afraid that maybe someone, somewhere is actually enjoying life.
11.2.2007 11:00am
Virginian:
Silly little poor people...thinking they can make decisions for themselves.
11.2.2007 11:11am
ChrisIowa (mail):
The flaw in the whole discussion is that it is rather silly to apply the concept of annual percentage rate to such a short term l0an. The cost of a payday l0an is not as much interest as it is a cost of a transaction.

A bank charges an origination fee, but the origination fee is minor in calculating the overall interest rate. In the case of a short term l0an, the origination fee overwhelms the interest cost.
11.2.2007 11:39am
titus32:
BobDoyle, I realize your question is rhetorical, but I responded to him only because I didn't know him. That was the first and last time. But I do think you give him way too much credit in your condemnation--his comments are just irrational and should be ignored as such.
11.2.2007 11:40am
Ben P (mail):

A bank charges an origination fee, but the origination fee is minor in calculating the overall interest rate. In the case of a short term l0an, the origination fee overwhelms the interest cost.


I think it's also notable that this is furthered by the circumvention methods used by some payday lenders. Especially in some jurisdictions that prohibit excessive interest rates.

Rather than a "typical loan" payday lenders rather do the following.

Person A needs money, and will receive their paycheck next week. Person A goes to a payday lender and writes a check for $200 on the *Understanding* that the payday lender will not cash the check until payday. In return Person A recieves $150 cash. (or some such amount)

If you try to calculate the "interest" on this, it would be phenomenally high. But in the common understanding of the term it's not really interest.
11.2.2007 11:55am
JBL:

Well, speaking for myself, there are really two answers to BobDoyles's question. First, I'm actually interested in the opinions of everyone, not just HC.

Second, I presented a couple of substantive opportunities to see if HC would take them. He or she didn't.

HC's examples of magnitude are nonsensical. Of course magnitude matters. That's the whole point: There is no difference in magnitude between payday lending profits and other industries'. I threw out a lovely opportunity to make a coherent argument that payday lending does in fact exploit people more than other business despite not making any more profit. Such arguments do exist; HC apparently isn't aware of them. HC didn't even question the empirical claim.

I put out the proposition that opposition to payday lending does not necessarily require a moral component, it can be opposed on purely empirical grounds. That statement is not antimoral, it's antipayday, but HC took it exactly backwards. Oh well.

And most importantly, my questions about alternatives were not at all sarcastic. There are in fact a whole variety of things besides payday lending that we can do to address the underlying problems faced by low income families. I was curious if HC would take the opportunity to expound on any of them. Here I give HC one or two points for actually addressing the issue before lapsing back into absurdity.

Since HC only saw fit to say one word on the topic, I'll add one more. In addition to Charity, which is a necessary short-term component, we also need to devote some resources to better Education.
11.2.2007 12:08pm
Mark D (mail) (www):
The main problem I had with the article when I read it was that they did this in South Africa, which is a bit different economy than the U.S. Besides the fact that some 17-or so states ban a 200%APR, not sure why they didn't do it here. It'd have had more relevance, IMHO.

As far as p@yd@y 10ans go, the problem is that they are rarely, if ever, used just once. Darn near every study done shows that very, very, very few folks actually use these things as intended and instead keep rolling over the debt. There is a reason, after all, p@yd@y 10ans are banned to service members and their families -- they're simply too dangerous to risk a service member's career over.

And if you think that's just an accident, see the article to which my name links -- the industry does this on purpose and will go out of their way to stop anyone who brings that up.

Of course, the bigger problem is that banks and credit unions have, for the most part, not offered any alternatives for short-term 10ans and have pulled out of areas where they are most often found (the inner city, less affluent rural areas, etc.).

I understand the risk involved and that the profit margins on a 10an with a reasonable rate, for such a short time, are quite low. But they have to start stepping up (as the FDIC has requested).

*Note: Spam filter made me type certain words a certain way. I understand why, but kind of annoying.
11.2.2007 12:20pm
markm (mail):
As a moderate libertarian, I think the courts should enforce contracts, but only within certain limits. Events render some contracts unenforceable in practice, and the laws and court rules governing contract enforcement need to recognize these possibilities and provide practical and as fair as possible ways of resolving the issues that arise.

E.g., in a service-for-training contract such as I discussed above, the training provider has to assume the risk that the subject may die and thus not fulfill his end of the contract. The provider also has to assume the risk that the subject flunks out; he might still provide some sort of service, but one far less valuable than expected (say, working as a hospital clerk rather than a doctor). And it may be that the subject just changes his mind, and I don't see any practical way of compelling a person to pass medical school... So if a contract for service doesn't have some reasonable escape clause, I think the legislature and/or courts will have to create a default escape clause.

Another common contract with slavery-like aspects is the contract aspiring performers and writers will sign with an agent. It's probably not worth an agent's time to represent unsuccessful performers or writers, but they do it in the hopes that a few of their clients will become very successful and the agent's 10% of these clients' income will make up for the time they put into trying to sell all the others. So these contracts are fixed-term, and it should be rather difficult for the performer who becomes successful to just drop his first agent before the end of his contract and negotiate with another one. OTOH, when the performer just doesn't get along with his agent, or has reached a point where the original agency simply lacks the capability of representing him well, there must be a provision for the performer to buy his way out, properly compensating the agent for time, money, and risk, but leaving the performer clear to find a better-suited agent.

(continued ... if I can ever get the rest of it past the VC's idiotic spam filter)
11.2.2007 12:59pm
markm (mail):

And finally, there are la0ns and other business contracts, which always run some risk that between business conditions and "acts of God" it will become impossible for one party to fulfill his part. Bankruptcy is one such condition. It should be possible for an individual to declare that the full payment of debts has become impossible, have the creditors divvy up whatever assets are left, and leave the debtor poor but free to work and to receive and spend his paychecks.

Note that bankruptcy laws of the sort I prefer (somewhat more lenient towards borrowers than the current ones, if I understand them correctly) make the l*nders shoulder more risk. That should restrain rapacious l*nding in itself - given reasonable bankruptcy laws, there's no profit in lending to people that cannot pay it back.

Even a Mafia l*nder will eventually recognize that his options are to make an example of the deadbeat and receive nothing (but encourager les autres), or to get what he can and write off the rest - and so he will lend at an outrageous interest rate to the man with no assets besides his body but who will use the la0n to get to work or to stock a hot-dog stand so he can make the money to pay the la0n, but not to the man who wants to buy crack and who isn't thinking beyond that. (I suspect what really makes or breaks a l*nder -legal or illegal - at this level is the ability to tell the difference.)

What I do not agree with is the theory that (1) people are idiots who cannot calculate when a la0n is in their interest or not, and (2) government people are not idiots and can make that assessment for you, and will make that assessment correctly even though they aren't bearing the consequences of a bad decision.
11.2.2007 1:00pm
Vivictius (mail):
Interesting, when I saw this post and first few comment yesterday I figured J. F. Thomas's comments would be the most idiotic but it seems HC managed to get that prize.

I personally know the owner of the local payday 10an shop (it is actually part of a chain covering most of the west coast). He is obviously an evil, awful man who according to some should be locked in a cage for the rest of his life. Or not. The fact is he provides a needed service that no one else will. The credit card companies and banks have government supported insurance that protects them from people defaulting on loans. He can not get that since most of his customers have proven them selves to be far too unreliable. He still has about a 20% default rate and the interest he charges reflects that.

Contrary to what some people think, most of his customers are not junkies getting one more hit. This really shouldn't be any surprise because guess what? Junkies are really bad at paying back 10ans and he isn't in the business of giving away money. Most of his customers are in the position Lively mentioned. Of those he will see about half once as they get their finances in order, the other half seem to cycle between paying things off and overcharging. I'm sure some people could tell us those people are just immoral and if we just locked them all up things would be great.
11.2.2007 2:46pm
Edward A. Hoffman (mail):
I wonder if these borrowers were told beforehand they were the subjects of an experiment, or if the researchers applied the same standards for human testing that are applied in other social science experiments. (The article might answer this question, but I don't subscribe to the WSJ and therefore can't access it.) I also wonder whether and how the researchers planned to compensate any of the subjects who might have been harmed by the experiment.
11.2.2007 3:37pm
HappyConservative:

We're talking about extremely high-risk l0ans. If people aren't compensated for that risk, they're not going to make the l0an, because they can find a better use for that money; we know that by the fact that nobody is making l0ans to them at better rates.


If your alternatives are:
(1) Charge 200% interest
(2) Invest your money elsewhere

I am fine with a law that forces you to choose (2). The business (1) is immoral.


There is nothing 'predatory' about a voluntary transaction


Are you trying to say that there is never something predatory about a voluntary transaction? So, if your lost for a long period of time in the wilderness and are facing dehydration, if someone happens to run across you, is it not predatory for that person to charge you $150,000 to help get you out (assume his costs for doing so are minimal).

Well, it really does not matter what you say, that is predatory.

And the fact is, that 200% interest rates are the same thing. If someone is crazy enough to knowingly and voluntarily sign up for such a l0an, they must be either in a very desperate situation, or they are very irresponsible, or they are very stupid when it comes to money. In any case, you are taking advantage of their situation and charging usurious rates.

If no one out there will l0an these people money, except at such rates, then these people should not get a l0an at all.

Am I really interested in protecting people from the negative consequences of their irresponsible decisions? No. What I am concerned about is the person making the l0an is a predator. If he or she can make the same rate of return in a different industry, working in a non predatory manner, then they should do so.


it's not "exploiting" someone to refuse to lose money when doing business with them


Agreed.


if people could get l0ans at better rates, they would -- unless, of course, you just think that these people are too stupid to figure out that a lower interest rate is better than a higher interest rate


You obviously know very little about how the psychology of sales works. People often spend much less than an optimal amount of time shopping for alternatives. Meanwhile, the person making the sale emphasizes the benefits and deemphasizes the costs and tries to apply pressure to make an immediate decision. You may not believe it, but these strategies work.

You would think that for any rational person, they would choose to spend time searching for better deals, rather than complete a transaction immediately, as long as the expected return of searching exceeded the opportunity cost. But this is not how people really work. People do not really know or try to reasonably estimate expected returns from searching. They do not behave in a truly rational manner; if they are in a particular emotional state, they make a deal right away even if the rational thing to do would be to search for a better deal.


And there is nothing 'moral' about making people suffer to avoid offending your tender sensibilities.


I think you are just about the first person to accuse me of having tender sensibilities.


Not being in their shoes -- let alone knowing the specific facts and circumstances they face -- you don't have any basis for contradicting that belief. This is by definition the best option they have for getting money; if it weren't -- if lower-interest l0ans were available, and/or if "charity" were available -- they'd chose one of those options instead.


One does not have to be in someone's shoes to recognize a really stupid decision. If someone goes out for a hike into the desert without a compass, map, knowledge of the area, or an adequate source of hydration, you do not need to be in their shoes to see that they are being stupid.

Finally, I say change the rules of the game. If people truly are in a situation where they objectively benefit from lending at 200% interest, there is something wrong. Red flags should go up. This person needs some outside intervention; because they are either irresponsible or because they are very unlucky. So, either charity or government services should be available to assess the situation, rather than pretending that something like this doesn't mean that there is something seriously wrong.

But most of all, I am not so much worried about the victim of such predatory lending. People must be taught personal responsibility, above all else. And one effective way to teach that is to let them suffer when they make a bad decision.

I am more worried about the lender, who has reduced himself or herself to the lowest form of life -- a human who is a predator towards other humans. Also, an enabler of personal irresponsibility.

A l0an shark who lends money to someone he or she knows is likely to gamble it away is a predator, the voluntariness of the transaction notwithstanding.
11.2.2007 4:53pm
HappyConservative:

I personally know the owner of the local payday 10an shop (it is actually part of a chain covering most of the west coast). He is obviously an evil, awful man who according to some should be locked in a cage for the rest of his life.


I never said for the rest of his life. I would be happy with 5 years in prison.
11.2.2007 4:55pm
HappyConservative:
By the Vivictus, that you are friends with a scum bag predator does not change the fact that your friend should be punished. Don't let your personal sympathies affect your judgment.


the other half seem to cycle between paying things off and overcharging


Its nice to see your friend making a nice profit off enabling the personal irresponsibility of others.

He is scum.
11.2.2007 4:59pm
HappyConservative:

What I do not agree with is the theory that (1) people are idiots who cannot calculate when a la0n is in their interest or not, and (2) government people are not idiots and can make that assessment for you, and will make that assessment correctly even though they aren't bearing the consequences of a bad decision.


How absurd. I mean, obviously a park ranger, being a dastardly government employee and all, cannot possibly tell when inexperienced people have inadequate prepared for a hike out into a challenging area of wilderness. It just is not possible for any person who works for the government to have superior knowledge of any situation than others. The second this guy became a park ranger, his IQ dropped 50 points.

Oh, and how arrogant to think that someone would not prepare adequately for a trip into the wilderness! That never happens. Never!

markm, you obviously have consumed far too much libertarian kool-aid to have clear judgment. Trying looking at the world as it is, not as you wish it would be. There are countless instances where outsiders can see something that an individual cannot: namely, they are about to make a very stupid decision. Sometimes, having an outside perspective from a situation gives on a superior vantage point. This is not uncommon.
11.2.2007 5:09pm
HappyConservative:
JBL,

There is a big difference in magnitude between a 200% interest rate and a 15% interest rate.

In fact, I do not have any problem whatsoever with someone who makes profit orders of magnitude higher than most people would make in the market. That is not the kind of magnitude I am talking about. Bill Gates deserves his money.

Even if it were true that institutions charging 200% were no more profitable on money invested, that does not change the fact that there is a huge magnitude difference between 200% and 15%.

There is nothing wrong with making a huge profit in a legitimate business (Bill Gates). But there is something wrong with making a little profit in an illegitimate business (200% interest rate lending).
11.2.2007 5:16pm
HappyConservative:

As far as p@yd@y 10ans go, the problem is that they are rarely, if ever, used just once. Darn near every study done shows that very, very, very few folks actually use these things as intended and instead keep rolling over the debt.


According to libertarians, if you the outsider see this sort of behavior, you are supposed to pretend that the people rolling over their debt over and over again at these outrageous interest rates have made good decisions.

And that is just plain stupid.
11.2.2007 5:19pm
JBL:
Actually, if it makes a difference, the national average APR charged by payday lenders is closer to 400%. In my state AdvanceAmerica charges 495.35%, assunimg a 14-day term. They're quite open about it.

HC: Would you object to a payday lender being set up as a nonprofit? The APR would still have to be relatively high to cover operating costs, but no owners would profit from it. Does that trigger the same objection, or does the lack of actual profit make it ethical?

If we can get donated space and volunteer labor, 15% interest MIGHT be enough to cover utilities and such, even with advances of $500 or less and a high default rate. I expect the APR would have to be substantially higher than that even for a nonprofit, but certainly less that 400% and possibly less than 200%, especially if we limit the hours people can access the service.

If that passes your moral test, my guess is that it would pass most people's, and it would be worthwhile to try to set it up. And if it could get sufficient funding it wouldn't take long to drive the for-profit payday lenders out of business, which would be a fine thing indeed.

If that doesn't work, we're back to the original question of what to do instead.
11.2.2007 6:19pm
Smokey:
A few years ago I knew a lady who was very middle class. Not poor at all. She got an insurance settlement, a check for around $17,000. It was the weekend [Saturday evening], and she wanted the money right now. So she decided to go to a local check cashing place that charged 10% of the check's face value.

Several of us told her it was nuts to give 10% to the check casher, when she could just wait until Monday and deposit the check in her bank. To get us off her case, she finally agreed to wait. Then she ducked out and had the check cashed. $1,700 gone, when she could have waited 48 hours and gotten it all.

See, that's the thing about freedom. Sometimes it's freedumb. But the alternative - the nanny state - is far worse.
11.2.2007 10:04pm
HappyConservative:
Smokey,

Freedom is all well and good. But there must be limits.
11.2.2007 11:18pm
markm (mail):
Happy: Have you ever actually dealt with government officials? The main issue isn't their intelligence but their motivation. Most people follow their own interest - and a bureaucrat's only occasionally coincide with those of the people they supposedly serve. Yes, your park ranger will tell you how to stay out of trouble in the woods, because he'll be one of those sent out to rescue you if needed - but he'd much rather you weren't in the park at all, so there was no chance you'd need rescued, nor would there be as much work required for park maintenance.
11.3.2007 11:32am
David M. Nieporent (www):
Freedom is all well and good. But there must be limits.
--- Signed, Fidel Castro.
11.3.2007 12:40pm
Peter Risdon (mail) (www):
Presumptuous of me, but this post about slavery and the working class is relevant.
11.3.2007 2:29pm