Tuesday, November 01, 2011
In California, there seems to be steam building up behind a leftist infatuation with regulating the payday loan industry. The fact that this is a matter of serious debate at all testifies to the power of ideas in political philosophy that are prevalent in a culture. Could you imagine one whiff of this if most people, for example, regarded the only proper role of a government as enforcement, with regard to non-fraudulent contracts between consenting, competent adults?
Be that as it may, I found Thomas Sowell's column about efforts to regulate this part of the financial sector very illuminating, regarding the context-free thought processes of its proponents.
Now to the 460 percent rate of interest. You don't need higher math to figure out that $45 is 15 percent of $300. How did we get to 460 percent? Very simple: By distorting the actual conditions of most payday loans.Not to wrongly concede that a lousy deal equals fraud (and would thus properly call for government action), but in order to make these lenders look predatory, proponents create a shady context out of thin air by imagining it (instead of looking at reality, the proper context) and taking advantage of the common notion that high interest rates are sinful. (Sowell seems, unfortunately, to share this view as he entertains the idea that the rates are justifiable.) At the same time, when imagination would suggest (and reality would confirm) that there could be a real value for the services of a payday lender, and thus, satisfied customers, proponents blank out and conveniently assume they know what's best for everyone else.
As the name might suggest, payday loans are short-term loans to tide people over until they get their next check, whether a salary check, a welfare check or whatever. Payday loans are relatively small sums of money borrowed for very short periods of time, often by low-income people who want some cash right now, for whatever reason.
Is it worth paying the $45 to get the $300 right now, rather than wait a couple of weeks for your check to arrive?
No third party can know that. But taking decisions out of the hands of those most directly affected is one of the central patterns of the political left that make them dangerous to the very people they think they are helping. This is not idealism. It is arrogance -- and too often, it is ignorant arrogance, as in this case.
The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long. [bold added]
Consider the implications of this kind of "thinking" in the broader context of our mixed economy, where laws banning this service or making it much harder to obtain can be passed. Two Ayn Rand quotes will be very helpful here. First, as John Galt of Atlas Shrugged puts it, "No concept man forms is valid unless he integrates it without contradiction into the total sum of his knowledge." Second, as Rand once stated in writing about ethics, "One must never make any decisions, form any convictions or seek any values out of context, i.e., apart from or against the total, integrated sum of one’s knowledge." With the government able to force us to act as people who know nothing in any real sense would have us act, we are thus rendered incapable, with increasing frequency these days, of acting as we judge best for our own benefit.