Tuesday, December 11, 2007
Payday Loans Redux
A new staff report by the Federal Reserve Bank of New York seems to confirm my fears about the regulation of payday lenders. As an economist, I believe that things like payday loan businesses arise due to some missing market, and to simply shut down that market does not address the original lacuna that caused it to arise. As payday borrowers are mostly lower income individuals, eliminating payday loans could end up making them worse off. Payday loans, as much as they seem usurious to us, seemed to be providing essential liquidity to a population that has a limited access to credit. Preliminary results are that credit troubles have worsened in areas where payday lenders were prohibited.
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There are current proposals to bail out mortgage-holders by freezing their loan rates--which amounts to Uncle Sam picking up part of the tab.
Since there is a large need for low-interest loans among a sizeable (and growing) portion of the population, wouldn't government intervention be better than a market solution? Couldn't governments get into the business of check-cashing at a rate that wouldn't amount to feasting on the poor?
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