The proposal to limit payday lending rates raises a nice contrast between the libertarian and statist lefts.
The issue here is not that APRs of 4000% are extortionate. For one thing, it's not clear that it makes sense to annualize the rate on what should be short-term loans, any more than it's sensible to say the FTSE 100 rose at an annualized rate of almost 10,000% this morning.And for another thing, such rates reflect high default risk; there might be good reasons why "legitimate" lenders don't undercut the likes of Wonga.
Instead, there are three issues here that have general applicability to the distinction between the statist and libertarian left.
1. The yuk factor. Those who want payday lending curbed think it repulsive that some should profit from the desperation of the poor. To them, the argument against payday loans is similar to that against markets in human organs; markets are unlikely to have acceptable outcomes if one party is desperate.
To libertarians, the yuk factor is less important than the fact that even apparently unequal transactions can be mutually beneficial; paying 4000% APR is unpleasant, but it's less unpleasant than having your electricity cut off or having to borrow from folk like Rick Neelan.
2. Should we protect people from themselves? The danger with payday lending is that the availability of credit will tempt people to spend more than they can afford and so such loans - rather than being a rare last resort in an emergency - will become regular, and thus onerous.
Libertarians don't respond that people are fully rational; few of us are wholly immune from akrasia or projection bias (pdf). Instead, they don't believe the state should protect people from themselves - especially when doing so comes at the cost of depriving some people of (occasionally?) beneficial loans.
3.Should political change be piecemeal or radical? Left libertarians say the best way to help the worst off is not to restrict payday lending, but rather to raise their incomes, for example through a high citizens' income.The statist left replies that this option is not available.Practical politics thus requires more modest but attainable policies, such as curbing payday loans. The same reasoning leads to other anti-libertarian policies such as the minimum wage.It's no accident that gradualists tend to be statists.
Which brings me to my worry. There's a danger that good practical politicians such as Stella Creasy, concerned to advance the interests of the poor one law at a time, get distracted from the need for more radical reform. And this can - entirely inadvertently - help encourage the closing of the Overton window against such policies.
* Ms Creasy is sound on one of the great scourges of our age.
V. thoughtful Chris. I'd add that the reality of the benefit cuts that are currently being executed by the government support the libertarian position.
Posted by: Rahul | November 29, 2012 at 02:55 PM
I think there is a role for the state to intervene in this insane, which could be classified as an information assumetry.
Posted by: Simon | November 29, 2012 at 02:55 PM
I dont think you can look at the issue, or Stella Creasy's position without considering the context in which this is happening. Austerity has just deliberately increased the deficit people live at. Tax credits subsidised mortgages and arguably this bit of the credit market has been given ideal conditions by austerity that Stella Creasy has sold as Labour's position, conditions helped a great deal by the penalties offered by mainstream lenders. Payday loans are a natural by product and consequence of austerity. A government and bank created market. Debt is not neutral, debt means control of your life. I dont think the problem here is the payday loans companies alone though.
TAx credits, if they disappear into the undeliverable universal credit, will bring with them the same level of control usually applied to those on out of work benefits, is now being applied to those in work. From where I sit, statist or libertarian, the combination of debt and welfare, and the willingness to expand this part of our credit market for austerity, shows that I don't want debt or welfare or the control that comes with them. But in an economy of part time, insecure employment it would appear that is no long an option.
Posted by: Lisa Ansell | November 29, 2012 at 04:14 PM
Edit function would be lovely
Posted by: Lisa Ansell | November 29, 2012 at 04:15 PM
I replied to you but couldn't put it in the comments (which I can now, oddly). It is here: http://www.leftfutures.org/2012/11/payday-loans-not-a-black-and-white-issue-in-reply-to-chris-dillow/
Posted by: Carl | November 29, 2012 at 04:17 PM
Wonga and their ilk have two USPs relative to pawnbrokers and loan-sharks.
The first is that they're an online business. This means much lower operating costs compared to high-street lenders. Though some of this saving is offset by higher advertising, the claim by Tom Worstall that it's expensive to run such an operation is specious. They don't have shops, they don't have to handle collateral, they don't need to employ heavies.
Their second USP is that they are a data management company, rather than a finance firm. Loan application assessments are automated (which is why they can boast of quick decisions), proven repayers are cultivated through spam (repeat business is crucial), and defaulters can be easily barred.
As Simon noted, the real issue here is information asymmetry. People naturally assume that usurers will charge usurious rates, and some even rationalise it as the result of higher default risk and higher transaction costs. What few "customers" appreciate is the extent to which Wonga are simply filling their boots.
They are guilty of the same predatory practices that more widely produce the wage repression which creates the market for payday loans in the first place.
Posted by: FromArseToElbow | November 29, 2012 at 06:06 PM
Finance seems to be composed of sharks but state and employers keep throwing people into the water via poverty so they get eaten by the sharks!
I get increasingly disgusted by the use of the words Libertarian and Liberal when the people who use them think poverty involves some kind of freedom.
"The law, in its majestic equality, forbids the rich and the poor alike to sleep under bridges, to beg in the streets, and to steal bread." (Le Lys Rouge Anatole France.
Posted by: Keith | November 29, 2012 at 08:21 PM
Does anybody know what sort of profits / returns Wonga makes?
Posted by: Luis Enrique | November 29, 2012 at 09:35 PM
"Should political change be piecemeal or radical? Left libertarians say the best way to help the worst off is not to restrict payday lending, but rather to raise their incomes, for example through a high citizens' income.The statist left replies that this option is not available."
Hang on, both those options are 'statist'.
Posted by: Pinkie | November 29, 2012 at 09:56 PM
I think everyone (including their customers) understands that the likes of Wonga are much more expensive than a normal loan if you keep the money long-term, and the large gentleman with the notebook who calls at your door is even more expensive, and everyone understands that nobody would borrow from Wonga if they had, say, a credit card available.
The question shouldn't be "are payday loans so evil that we should ban them" but "if payday loans are to expensive, should the state step in as a cheap lender?" Yes Wonga makes a proft - it made 45 million quid last year, and loaned out 600 million quid or so. They're making good money, but it doesn't look like there's room for someone to undercut them dramatically and still make money.
Do people want the state to take on the role of mass-market short-term emergency lender? I don't think so. Quite apart from anything else, if the state was able to operate that efficiently, it might start by giving people faster access to benefits, rather than it taking weeks between someone applying for a benefit and the money showing up.
Posted by: Sam | November 30, 2012 at 12:04 AM
*instance
Posted by: Simon | November 30, 2012 at 01:21 AM
Compared to what we consumers will sometimes do to ourselves when it comes to money, even Wonga can start to look like an angel. Have you been Wonga'd? http://www.unexpectedutility.com/blog/behavioural-living/have-you-been-wongad/
Posted by: Herman Brodie | November 30, 2012 at 06:45 AM
You state, "The danger with payday lending is that the availability of credit will tempt people to spend more than they can afford and so such loans - rather than being a rare last resort in an emergency - will become regular, and thus onerous."
But, in today's poor economy, many people - mostly single mothers - use these loans to meet everyday expenses. Take that away and then what?
Quit trying to fix the payday loan industry - who is just meeting a need - and work on ways to take the need away - like fixing the economy.
Posted by: Pure Cash Loans | November 30, 2012 at 12:46 PM
^ wonder how much was that one worth. 50p?
Posted by: Neil | November 30, 2012 at 01:14 PM
"the claim by Tom Worstall that it's expensive to run such an operation is specious."
Rilly?
"Yes Wonga makes a proft - it made 45 million quid last year, and loaned out 600 million quid or so."
Net margin is 7.5% of money lent.
If they're charging 4,000 % APR then I rather imagine that they must have some pretty hefty costs in there then.
Posted by: Tim Worstall | November 30, 2012 at 01:43 PM
Tim - its quite possible they are taking large reserves for possible loan losses (PDA - provision for doubtful accounts). And this is why net margins are so low. Then again, this would show up in the balance sheet/ cash flow statements. Without reading those, we won't know whether the net margin is an accurate figure or not.
Posted by: Rahul | November 30, 2012 at 02:57 PM
Many of poor people are really desperate to get a payday loan which is one of their choice when they are having a financial problem.In Finland payday loan is alternative way to solve their financial problem like paying bill which not listed in list.
Posted by: Päivi Kemppi | December 04, 2012 at 06:51 AM
You say: Should we protect people from themselves?- I would like to re-phrase the question: Why not people start thinking before applying for payday loans? I agree that this is a temptation, but there are millions of those who can resist it even though they do have critically low wages and big families to feed. It is not our or Wonga’s (or any other payday lending company) responsibility. It is mine, yours and whoever else other responsibility. Don’t blame others and start from yourself. Be a grown up and be ready to face consequences of unwise actions.
Posted by: Alicia@Payday Loans@ | December 04, 2012 at 08:56 AM
V. thoughtful Chris. I'd add that the reality of the benefit cuts that are currently being executed by the government support the libertarian position.
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