There's Gold in Them Thar Rags

[don]

Always has been, always will be....

Montana voters on Tuesday approved a ballot initiative to cap interest rates on short-term credit at 36 percent, effectively banning payday loans -- paycheck advances of several hundred dollars with fees that amount to annualized interest rates of 400 percent or so.

During the payday's peak in the mid-2000s, storefronts hawking high-interest short-term loans in 38 states outnumbered the nation's McDonald's and Burger King venues combined, reports author Gary Rivlin in "Broke, USA: From Pawnshops to Poverty, Inc. -- How the Working Poor Became Big Business."

With the help of brand-name banks like JPMorgan Chase, Bank of America, Wells Fargo, and Wachovia, subprime and payday lenders raked in $150 billion in annual revenues, in what Rivlin concludes amounted to a 15 percent "poverty tax" on the working poor.

Payday proponents hate when the cost of their product is expressed annually, like in the Montana ballot battle. "People will always vote to make something cheaper, whether it's payday loans, electric bills or taxes," said Steven Schlein, spokesman for a payday PR outfit called the Community Financial Services Association. "If they were asked about 'banning' the service the outcome would have been different."

And fringe finance entrepreneurs point out that while their rates are steep, 400 annualized percent interest on a loan paid back in just two weeks is better than having your kneecaps broken by the mob.

When they need money in an emergency, what alternative do the working poor really have?

http://www.huffingtonpost.com/2010/1..._n_779072.html

[thriftyandboringinohio]

Re: There's Gold in Them Thar Rags

When they need money in an emergency, what alternative do the working poor really have?

Some truth to that. Pawn shops have long made that argument, that they are the only lender to the poor. None the less, 400% APR without limit is predatory when the loan rolls forward under the original terms and snowballs to crush the borrower.

Boh sides could have their way if they'd cooperate. Allow a modest fee for the short term loan (which calculates to huge 400% APR), but require a reasonable less-than-30% APR if loan rolls forward beyond a month or so.

[Master Shake]

Re: There's Gold in Them Thar Rags

Always has been, always will be....

Montana voters on Tuesday approved a ballot initiative to cap interest rates on short-term credit at 36 percent, effectively banning payday loans -- paycheck advances of several hundred dollars with fees that amount to annualized interest rates of 400 percent or so.

During the payday's peak in the mid-2000s, storefronts hawking high-interest short-term loans in 38 states outnumbered the nation's McDonald's and Burger King venues combined, reports author Gary Rivlin in "Broke, USA: From Pawnshops to Poverty, Inc. -- How the Working Poor Became Big Business."

With the help of brand-name banks like JPMorgan Chase, Bank of America, Wells Fargo, and Wachovia, subprime and payday lenders raked in $150 billion in annual revenues, in what Rivlin concludes amounted to a 15 percent "poverty tax" on the working poor.

Payday proponents hate when the cost of their product is expressed annually, like in the Montana ballot battle. "People will always vote to make something cheaper, whether it's payday loans, electric bills or taxes," said Steven Schlein, spokesman for a payday PR outfit called the Community Financial Services Association. "If they were asked about 'banning' the service the outcome would have been different."

And fringe finance entrepreneurs point out that while their rates are steep, 400 annualized percent interest on a loan paid back in just two weeks is better than having your kneecaps broken by the mob.

When they need money in an emergency, what alternative do the working poor really have?

http://www.huffingtonpost.com/2010/1..._n_779072.html

It seems to me that if someone we truly concerned about the poor and the payment of these high rates,they would, along with some like-minded colleagues, start enterprises that would provide the same service but at lower rates. I mean, if margins are so high and barriers to entry so low, there is money to be made here, no? Or, perhaps, the rates are so high because the risks are higher? I don't know, but there seems to be a free market solution available rather than the standard lefty response of prohibition.

[thriftyandboringinohio]

Re: There's Gold in Them Thar Rags

I don't know, but there seems to be a free market solution available rather than the standard lefty response of prohibition.

Lefty response? Have you spent much time in Montana? The single largest employer in Montana is a farm (Aageson farm in Gildford with 3,000+ employees).

Those folks are hard at work at their own jobs and probably not interested in starting banks. They recognize abuse when they see it and voted to stop it. Good simple fair play and decent treatment, issued by farmers and ranchers of character, not lefties by any stretch.

[Master Shake]

Re: There's Gold in Them Thar Rags

Lefty response? Have you spent much time in Montana? The single largest employer in Montana is a farm (Aageson farm in Gildford with 3,000+ employees).

Those folks are hard at work at their own jobs and probably not interested in starting banks. They recognize abuse when they see it and voted to stop it. Good simple fair play and decent treatment, issued by farmers and ranchers of character, not lefties by any stretch.

Good point. I was reacting to the source of the article.

Nevertheless, if you think the rates are too high, simply offer the same service with lower rates.

[Scot]

Re: There's Gold in Them Thar Rags

In other news, hospitals are expecting a dramatic increase in admissions to reset broken legs.

[Mn_Mark]

Re: There's Gold in Them Thar Rags

It seems to me that if someone we truly concerned about the poor and the payment of these high rates,they would, along with some like-minded colleagues, start enterprises that would provide the same service but at lower rates. I mean, if margins are so high and barriers to entry so low, there is money to be made here, no? Or, perhaps, the rates are so high because the risks are higher? I don't know, but there seems to be a free market solution available rather than the standard lefty response of prohibition.

Amen to that! If they're gouging the poor without economic justification for the prices they charge, then let competitors come in and offer lower fees/rates for cashing checks. We don't need the government "protecting" the poor. It just eliminates options for them and makes things more expensive.

[don]

Re: There's Gold in Them Thar Rags

I thought the outfit went to Washington.

[Jeff]

Re: There's Gold in Them Thar Rags

Amen to that! If they're gouging the poor without economic justification for the prices they charge, then let competitors come in and offer lower fees/rates for cashing checks. We don't need the government "protecting" the poor. It just eliminates options for them and makes things more expensive.

So, the folks on this forum are actually stating that the fix for the existence of loan sharking is increased competition? Seriously?

[EJ]

Re: There's Gold in Them Thar Rags

I'm always surprised when I hear free market ideology applied to usury. Usury is the banking equivalent of slavery.

Usury, like slavery, both exploits and perpetuates poverty. That's why slavery is illegal everywhere, and until the 1980s usury was illegal across the US and most countries for centuries. This issue driving anti-slavery and anti-usury policies was economics. Morality is how it was sold to the masses.

The only way to grow a slave-based economy is to keep getting more slaves, because there is no incentive to improve productivity if labor costs are zero. Governments found at the dawn of the industrial age that mechanization, aka rising productivity, works better than slavery to grow a competitive modern national economy.

The only way to grow the usury-based corner of a financial system is to create a growing pool of low income, high credit risk customers, e.g., poor people. The credit card industry rigged such a system in the US for decades. As James Scurlock told us years ago, some, but not all, credit card companies intentionally turned low interest rate, low margin customers into high interest rate, high margin customers by overloading them with debt, catching them in the fine print of inscrutable contracts, wrecking their credit ratings, then re-instating them as customers at a higher interest rates. I have personally verified this myself independently. Again, not all, but some companies did this. This is why I'm with Bill Black on prosecuting law breakers in the banking and credit card industry. How would you like it if you have to compete in your industry, whatever that is, with thugs and criminals? Where Bill and I disagree is on methods. I propose an amnesty system whereas he wants to prosecute every violation. But then I'm a pragmatist.

But what of loan sharks versus payday loan outlets? Surely there is nothing systematic about either. They are there only as the lender of last resort for the poor that would exist in any case, and the latter is a better lender than the former, no?

Of course, illegal loan sharks are worse than law abiding lenders. Payday loan firms do not use blackmail or threaten customers with violence.

But that's the wrong question. That assumes an either/or choice. The fact is that loan sharks are where the poor go after the payday loan firms have taken the rest of their credit, credit that they might still have if they didn't fall off the last wrung of the debt surf ladder, or get onto the ladder in the first place.

The best way to stop the debt serf cycle is at the top of the ladder, by removing the motivation to use credit to purchase depreciating assets by increasing the return on savings, that is, raising interest rates over the rate of inflation; nothing puts the loan sharks and payday loan operators out of business faster and helps build savings that can be used for education than positive interest rates, that is, rates above the rate of inflation.

The social enemy isn't high interest rates for the poor, it's high interest rates only for borrowers and low rates for creditors. That's the definition of usury that societies, most often through religious institutions, have banned throughout the centuries until modern times. The alternative is debt slavery.

[oddlots]

Re: There's Gold in Them Thar Rags

Re. the Bill Black reference, no indictments? Black and notably Tavakoli have made a very good case for systemic, outright and stupendously profitable (and therefore damaging) fraud. What is the argument for an amnesty here when a) the costs have been crippling b) the finance lobby still occupies the commanding heights of political and economic power despite having disgraced themselves utterly in terms of any fair metric of mutually beneficial trade. How would an amnesty serve to re-balance such a situation?

[FRED]

Re: There's Gold in Them Thar Rags

Re. the Bill Black reference, no indictments? Black and notably Tavakoli have made a very good case for systemic, outright and stupendously profitable (and therefore damaging) fraud. What is the argument for an amnesty here when a) the costs have been crippling b) the finance lobby still occupies the commanding heights of political and economic power despite having disgraced themselves utterly in terms of any fair metric of mutually beneficial trade. How would an amnesty serve to re-balance such a situation?

EJ writes in:

Objective: Get all the bad players out of the industry and leave the good players to carry on in a clean business environment.
Option 1: The 100% Prosecution Argument - The law has to get all the law breakers because to let any get away with the money they've made is unfair to law abiding citizens and encourages future misconduct.
Option 2: The Amnesty Argument - There are too many of bad players to prosecute all of them, and they are too well protected. Prosecute a few to show you're serious, offer to let the others avoid prosecution if they turn in their winnings and agree to stay out of the banking industry for ten years.

Which one has a real chance of working?

[jk]

Re: There's Gold in Them Thar Rags

EJ writes in:

Objective: Get all the bad players out of the industry and leave the good players to carry on in a clean business environment.
Option 1: The 100% Prosecution Argument - The law has to get all the law breakers because to let any get away with the money they've made is unfair to law abiding citizens and encourages future misconduct.
Option 2: The Amnesty Argument - There are too many of bad players to prosecute all of them, and they are too well protected. Prosecute a few to show you're serious, offer to let the others avoid prosecution if they turn in their winnings and agree to stay out of the banking industry for ten years.

Which one has a real chance of working?

the usual mechanism is to find those easiest to prosecute [i.e. with the best evidence/court case] and get them to turn state's evidence against higher ups in return for leniency in their own cases. if there are to be "a few" who really go down, wouldn't it be nice if they were at the highest level?