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1

More effective as a separate letter, don't you think? Wonder how many of our King County Councilmembers will sign ...

Posted by Will in Seattle | February 8, 2007 5:45 PM
2

Unless the Pay Day lender are acting a collusive, cartel-y way, it's likely that the profit they generate are the profits they need in order for it to be worthwhile for them to continue to make such loans. Putting on cap on them will either drive them out of business, or will force them to turn away the very neediest borrowers. Now perhaps there are enlightened objections to my argument here, but as far as I can tell, most people who are in favor of capping interest rates in such situations haven't even heard these arguments and certainly don't have an answer to them. Please, study a little economics before forming opinions on such matters. At the very least, you'll be in a better position to defend yourself.

Posted by Econ101 | February 8, 2007 6:13 PM
3

More likely, their lawyers will figure out a way to structure their check-cashing fee, which is most of their business (not actual loans), so that it avoids the provision of the law as it is written, and everything will continue as before.

Posted by Fnarf | February 8, 2007 6:20 PM
4

Ah, but Econ, you miss the point. Government isn't there to protect the profit of someone who chooses to go into business. They ARE there, however, to protect those who have too little from having even less. It isn't a lesson in econ - we all get that the lenders want to keep the profit margin (that you can only speculate about, btw) as large as possible so it's worth it for them to stay in business. Government's interest is in ensuring that their search for profit doesn't come at the expense of someone already down to their last chances. Government is a mediator in this business/consumer relationship - government does not exist to enable profit.

Posted by switzerblog | February 8, 2007 6:24 PM
5

Oh, that's just too rich. You drag out the straight-up Econ 101 spiel, that everybody and their mothers could recite backward and forward, and then follow it up with, "most people who are in favor of capping interest rates in such situations haven't even heard these arguments and certainly don't have an answer to them".

Newflash, smartguy, everybody is way ahead of you on this. Nobody gives a shit if the shadiest of the shady money lenders will close up shop because the regulations force the industry to become less exploitative. That just opens the door for those moneylenders with sufficient business acumen to keep a business afloat on something less than a 300% margin. That pretty much rules out your average free-market ideologue, but most of them could use a lesson in what it feels like to go hungry.

Posted by Econ 102 | February 8, 2007 6:38 PM
6

Switzerblog writes: "[Government is] there, however, to protect those who have too little from having even less."

My point is that economic theory suggests that this measure will actually hurt those it is intended to help. We can debate whether the measure will have that effect, but it's disingenuous or uniformed to act as if only one side of this debate can make a claim that their position is in the best interest of the borrowers. The basic argument is that by reducing the profit incentive for lenders, they will withdraw their capital from this sector and invest it elsewhere in another more profitable activity. (Marx understood this.) Regulating this particular industry will not change that economic reality. The net effect is that people who need loans the most -- the truly desperate -- will find it harder to get them. Not that the lenders are not being required to issue loans.

Hi Econ102. I hope you are right -- that those who oppose this measure understand the arguments on both sides, even if they only find one side convincing. But nothing I see suggests that that is the case.

You write: "Nobody gives a shit if the shadiest of the shady money lenders will close up shop."

Actually their customers do. That's why they patronize them. Do you really think that their customers wish the lenders wouldn't make loans to them?

You seem to assume that other lenders will simply step up to the plate under the new rules. What economic theory predicts is that they won't; if there's more money to be made by investing in some other industry, that's where the capital will go.

If one lender is charging more than necessary to make a profit, another lender will undercut them (in the absence of a cartel, which is very hard to maintain over time). They probably charge a high rate because their customers are, in general, are very high risk for non-payment.

There's room for disagreement here, but you can't simply wave away these arguments as the rationalizations of greedy capitalists. You have to explain the particular error in this thinking -- or at least don't claim to understand the opposition, and certainly not in a mocking, sneering tone.

Posted by Econ101 | February 8, 2007 7:29 PM
7

Newsflash, "Econ 102", if it were possible to do it for lower fees, and still make a profit, someone would be doing it already. Capitalism has that effect, in absence of collusion.

So has anyone asked the "victims" if they care that payday loan companies will all be driven out of the state?

Posted by BC | February 8, 2007 7:34 PM
8

"Newsflash, "Econ 102", if it were possible to do it for lower fees, and still make a profit, someone would be doing it already. Capitalism has that effect, in absence of collusion."

Free market capitalism may do that IN THEORY, but in reality there are all sorts of factors at play here that aren't accounted for by simplistic Econ101isms. These are very low income "consumers" that we are talking about, and their ability to shop around for the best deal is limited by their economic circumstances. Not to mention that out-and-out collusion is completely unnecessary to inflate profit margins within a given industry.

And really, it's not enough for a free-market ideologue to say "if it were possible to do it for lower fees and still make a profit, someone would be doing it already". That's begging the question. That the payday lending industry is charging such high interest rates is not evidence that they need to in order to stay in business. You'd actually need to look at their profitability to make that sort of point.

Society has a legitimate interest in limiting the consequences of this type of lending. All indications are that it is often to the long-term detriment of its customers, and the financial consequences are shared by other creditors. The FDIC has expressed concern that this sort of unsecured credit actually poses significant risks for "insured depository institutions". Payday lending is not just a private transaction between borrower and lender, but one whose consequences can be felt in subtle and not-so-subtle ways throughout our economy.

Posted by Rodrigo | February 8, 2007 8:13 PM
9

Rodrigo, here's how I imagine an economist would respond to your points:

If consumers were unable to shop for the lowest price and were hence the victims of exploitative pricing, then a new lender would sense an opportunity and enter this sector. These new lenders would open up in the same neighborhood as the exploitative lenders and would undercut them to win business. That this is not happening is an indication that profits are were theory predicts they will be: just above the mark needed to make it worthwhile in business, but not much more.

You don't really make an argument to show why you think collusion is possible. The historical record about cartels is pretty clear. Soon enough, one of the parties starts cheating on the deal and it breaks up. Where are the examples of stable cartels in modern-day America? It's illegal (except when what's for sale is labor) and that's another reason that cartels don't last.

As for your accusation of question begging, the point is that other lenders would enter the market and drive prices down, if there was more profit to go around. Until you explain why you think this has not happened, you haven't poked a hole in that argument at all.

You apparently think you know what's in borrowers' best interest -- against their own judgment as revealed through their actions. Perhaps you do. But I wonder if you apply that same approach to outlawing other self-destructive behavior, such as drinking, smoking, drugging, adultery, etc. Or maybe you are only selectively comfortable with the government making decision for other people against their wishes.

I'm not knowledgeable enough to respond to your argument about FDIC's concern.

Posted by Econ101 | February 8, 2007 8:31 PM
10

Some regulation seems in order, this attempt goes too far.

And of course, the water is being carried by middle class do gooders who don't want to admit they are foolishly paying 31 per cent on their credit cards.

Bank of America charges 5.00 to cash checks. For small checks, reg. customers, Check Mart charges - 3.95, who is predatory?????

Posted by caleb | February 8, 2007 9:30 PM
11

You two econs are both full of it. The reason the market hasn't downward corrected is because there's been absolutely no economic incentive to do so. What person in their right mind would get into the pay day loan business and try to undercut a market that is inflating like a frakking helium balloon?

Capping interest rates will have mutliple beneficial effects by: driving out the deadwood, the carpet-baggers who CAN'T or won't operate on less than three figure margins, while leaving the field wide open for those who can. Consumers will get a better deal, and drive business to those lenders who can thrive at a lower margin, while at the same time increasing their clientele.
So, while it's true capping will shrink the number of lenders, but that's not the same as postulating the market will dry up completely; it simply means those who can meet the caps will reap HUGE profits due to volume, which will probably offset what they lose in margin.

And all that being said, just what is wrong with looking at this situation in terms of its human, as opposed to merely its economic cost-benefit? The notion that the poorest among us, the most economically deprived, the most desperate, should be forced to dig their own graves purely for the sake of keeping a roof over their heads or food in their bellies just strikes me as the most mean-spirited kind of Scroogery.

I'm all for the Free Market, blah, blah, but not when it purposefully contributes to increasing penury and deprivation. That's just wrong no matter how you slice it.

Posted by COMTE | February 8, 2007 10:17 PM
12

COMTE - your passion is breath takeing.

Your logic and arithmetic flawed.

If banks as one post noted, get 26-31 per cent on low management credit cards, AND they do - who will make these loans at higher risk and greater overhead at 36 per cent?????? (just checked my WA MU statement - 31.4)

Your grasp of market is really juvenile and flawed. Can tell you have never owned any business.

Middle class folks solving money problems for the under class - not on the same planet.

Thanks God in the Navy I could borrow 15 for 20 untill payday. Oh, but the interest rate was horrible, but the sex was great. Didn't have to buy food or pay rent or get clothes -- still needed some quick cash.

Posted by Freddy | February 8, 2007 11:18 PM
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COMTE writes: "The reason the market hasn't downward corrected is because there's been absolutely no economic incentive to do so. What person in their right mind would get into the pay day loan business and try to undercut a market that is inflating like a frakking helium balloon?"

Your error is in thinking of players in the lending markets as cooperators rather than competitors. They are vying for the same customers. That's their incentive to lower prices right to just before the point where they'd be making more money doing something else with their capital. So that I can sleep well tonight, at least let me know that you have understood this point. I have heard no comment here that suggests you have.

COMTE writes: "Capping interest rates will have mutliple beneficial effects by: driving out the deadwood ...."

What drives out deadwood is competition. If you have a lower price and better service, customers -- even the desperate ones -- no, *especially* the desperate ones -- put your competition out of business for you. I'm sure you can think of some examples of this in your own life.

COMTE writes: "... while leaving the field wide open for those who can ..."

This whole metaphor is wrong. Anyone can set up their own lending business if they want to. The high-interest shops would be no threat to those charging lower rates. The probable reason it's not happening already is because rates are as low as they can be for this kind of high-risk borrower.

COMTE writes: "And all that being said, just what is wrong with looking at this situation in terms of its human, as opposed to merely its economic cost-benefit?"

Look, I grant that you have the best interests of the borrowers at heart, although I think the policies you favor are careless regarding their likely effect. Why won't you grant the same presumption of goodwill to your opponents here. Your insistence that *your* heart alone is pure does not mean that your policies achieve your goals.

Posted by Econ101 | February 8, 2007 11:28 PM
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#7: Is it possible that people use use payday lenders aren't shopping around for better rates? They need the money TODAY or they don't eat. No time for that sort of thing. Getting a payday loan isn't like shopping for a car or an amenity.

If I was to go to the emergency room, I wouldn't haggle on price or go from ER to ER searching for a better deal. I would just get my appendix out now!

Posted by shopping | February 8, 2007 11:31 PM
15

"Is it possible that people use use payday lenders aren't shopping around for better rates?"

If so, then what's your explanation for the fact that lenders haven't raised their rates even higher than they are now?

Posted by Econ101 | February 8, 2007 11:38 PM
16

Luckily, I took Econ 100, 101, 102, 200, 201, 202, 210, 220, 300, 301, 400, and 402.

And I can easily disagree with econ101.

People always have excuses for their behavior.

Posted by Will in Seattle | February 9, 2007 12:00 AM
17

Look, all of your arguments are failing to take into account something that is included in the legislation.
Econs - you're right that the only reason rates are so high at these places is because that's the only way to make these businesses profitable enough for someone to want to create them. The high likelihood of late payers means they will rape them w/ charges and interest to make up for it.

What you're arguing, though, is 'tough shit for the poor folk!' Should people who need this service really have their only choice be 400%+ rates? That's absurd! We're not talking about some nice fancy luxury, here, we're talking about money for staying alive, keeping an apartment, paying for food and heat.

That's why the legislation INCLUDES the creation of projects between government and CREDIT UNIONS to offer lower interest, short term, small volume loans. Credit unions have the means to offer these loans, but haven't entered the market because it's not terribly profitable unless you charge wild interest rates. IT'S A PROBLEM THAT YOUR ECONOMIC, FREE MARKET, 'INVISIBLE HAND' THEORY CAN'T SOLVE. But if government gets involved, they can either require or convince, (with insurance,tax breaks, or other incentives), these credit unions to offer services that fulfill the needs of the poor, even if it doesn't make them a big profit.

Your juvenile devotion to 100% free markets is naive. Government exists to force the market to do what it would not do on its own so that people who are disadvantaged, for whatever reason, don't get left behind.

Posted by steve | February 9, 2007 6:35 AM
18

caleb @ 10: Exactly. What should be amended on this bill is a prohibition on charging for cashing a check at the bank (particularly if it's your bank OR the check is drawn on that bank).

Posted by Dave Coffman | February 9, 2007 8:22 AM
19

steve writes: "Government exists to force the market to do what it would not do on its own."

This legislation will not force lenders to make loans at lower rates. Economic theory predicts that they will exit the market or drop their highest-risk customers. That's bad for the borrowers who need help the most.

Regarding a possible involving government and credit unions, I don't see anything about that mentioned in the bill (http://www.leg.wa.gov/pub/billinfo/2007-08/Pdf/Bills/House%20Bills/1020.pdf). Perhaps it is addressed elsewhere.

Posted by Econ101 | February 9, 2007 8:57 AM
20

All I know is the vast majority of economists - today - decided - it's in the Wall Street Journal you red commie econ101 - that gas taxes are the way to use the capitalist market economy to shift us to a more accurate use of energy sources and away from the tax-subsidized oil use your comrades in the Red House like Bush and Cheney would have us do.

Now, bow down before the Econ gods and go enlist to die in Iraq, you freshman!

Posted by Will in Seattle | February 9, 2007 1:22 PM
21

Will in Seattle: I'm strongly in favor of higher gas taxes. Economists generally believe that it is better to raise gas taxes than tighten fuel efficiency standards, if your goal is to encourage alternative energy use. (The reasons for this are complicated and beyond the scope of a blog comment.)

The broader point is that economists don't set goals; instead, they use economic thinking to design policies that are likely to achieve the outcomes that politicians (and indirectly, the voting public) have identified as desirable.

In the payday loan example, the desired outcome is "improve the lot of desperate borrowers." We're only debating here about which policies do (and do not) leads us toward that goal.

Posted by Econ101 | February 9, 2007 1:55 PM
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No, you're trying to find "reasons" why it's ok to rip off the poor to make the wealthiest 1 percent even richer. But you hide behind the words to disguise the reality - who do you think OWNS the payday lenders - mostly the very same LARGE banks that refuse to loan people money and charge them $45 if they run short of it. More than half of the "earnings" of modern banking corporations is from fees nowadays - used to be from loans and the spread on deposits.

Come back when you learn how the world actually works.

Posted by Will in Seattle | February 12, 2007 12:37 AM
23

Will in Seattle: I give you the benefit of the doubt that you are misguided but sincere. Why can't you grant the same presumption to your opponents here? People who see evil in those who merely disagree with them (and give reasons for doing so) are intellectual crybabies.

> who do you think OWNS the payday lenders ...

I am unconcerned with who owns the payday lenders. I am concerned with the welfare of their customers, just as you claim to be.

Posted by Econ101 | February 13, 2007 9:38 PM

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