Wednesday, June 4, 2008

The Return of Usury Laws

Democratic Governor/Baptist Minister Ted Strickland along with the Republican state legislature has banned “Payday lending” in the state of Ohio. They have done this by capping the interest rate that may be charged at an annual rate of 26%. The effect will be that no one will be able to lend short-term money to risky borrowers (ie. Pay day lending). Previous borrowers (generally the relatively less well off) are thus banned from borrowing short-term.

I have never taken out a Payday loan, but I know people who claim to have. These people don’t seem to think they were scammed, although they still don’t like the high rates. They wouldn’t have used payday lending if they had preferable alternatives. So, they paid the high rate – not the end of the world. Payday loans generally aren’t pleasant, but there is a service being provided here – making high risk loans. High risk loans necessitate high rates. But, now they are illegal. Some of this lending will no doubt go underground (remember loan sharks). Also, this will no doubt be a boon another form of credit for high risk borrowers, Pawn shops (Until they are also banned).

When I see market transactions that I don’t view as pleasant, my first instinct (like Tyler Cowen’s) is not necessarily to ban them. But many people do have that instinct, often on religious or pseudo-moral grounds. My feeling is that part of the dislike of Payday lending is aesthetic – the dislike of bad neighborhoods. The middle and upper classes don’t really like poorer neighborhoods, which are often full of Pay-day lenders, which are often full of poorer people. There is certainly a tendency of moral crusaders in society to take away unbeautiful options from those who are not rich. The institution of government mandated wage floors, the bizarre campaign against Wal-Mart, and usury laws are three prominent examples of this trend. Although on the surface morally-inspired, I think this is a mean-spirited and anti-liberal trend. I find it worrying.

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