The Seductive Snowballing of Government

So far I have not noticed any local mention of Saturday’s New York Times article featuring greedy, villainous, predatory payday lenders in New Mexico. At least that is the impression you get from reading the article that is not on the editorial page (“Seductively Easy, Payday Loans Often Snowball”):

While such lending is effectively banned in 11 states, including New York, through usury or other laws, it is flourishing in 39 others. The practice is unusually rampant and unregulated in New Mexico, where it has become a contentious political issue. The Center for Responsible Lending, a private consumer group, calculates that nationally payday loans totaled at least $28 billion in 2005, doubling in five years.
The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.
In many states, including New Mexico, lenders also make no effort to see if customers have borrowed elsewhere, which is how Mr. Milford could take out so many loans at once. If they repay on time, borrowers pay fees ranging from $15 per $100 borrowed in some states to, in New Mexico, often $20 or more per $100, which translates into an annualized interest rate, for a two-week loan, of 520 percent or more.

I have no doubt that some of the borrowers get into the kind of trouble such as that of Mr. Milford of Gallop:

Mr. Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to Gallup and visits 16 storefront money-lending shops. Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”

But the article raises a lot of unanswered questions:
Specifically with regard to the situation of Mr. Milford’s seeming dilemma, why doesn’t he get a bank loan to extricate himself from his “ritual?” Someone with a stable income (civil service retirement and veteran’s disability payments) should easily qualify for such a loan. Why wouldn’t the reporter dig a little deeper? It looks like there may be something else going on here.
Did Mr. Milford and others like him encounter some kind of fraud on the part of the payday lender? Was there something about his side of the voluntary transaction that was misrepresented? After all, it is a government function to protect us from fraud.
Economists always want to know about the road not traveled. What would have been the consequences had Mr. Milford not gone in debt to the payday lender? What did he need the initial loan for in the first place? It seems to me that would be a logical question for the reporter to ask.
With regard to the bigger picture:
If some 90 plus percent of these borrowers are responsible and do not get into trouble, then why do we want to penalize them for the irresponsible behavior of New Mexicans like Mr. Milford? Would we rather have them bouncing a check for a much higher fee? Would we rather have their heat turned off. Would we rather have their car repossessed? Would we rather they enter the black market for loans when they are desperate?
If the rates charged by payday lenders are so outrageous, then why don’t entrepreneurs enter the market and charge lower rates? This would be a great opportunity for Diane Denish and her feel-good comrades to show their concern without having to legislate more New Mexico style government coercion. They say that payday loans should be capped at a 36 percent annual interest rate. That means she should be able to satisfy the demand for these loans for a fee of only one dollar and thirty-eight cents for a two-week loan of $100. That is quite a saving over the $15 to $20 (or “sometimes more”) currently charged by these lenders.
People tend to do much better when they make decisions for themselves even if, in retrospect, a mistake may have been made. The New York Times is obviously pushing for government to keep us from obtaining payday loans. They think the government knows better for us what we need (or don’t need) than we do.
To the contrary, prosperity results when government does not snowball, because people tend to make much better decisions for themselves (even accounting for all the mistakes we make).
Here is something that really annoys me about this whole thing:

He said the association supported “fair regulations,” including a cap on two-week fees in the range of $15 to $17 per $100, a level now mandated in several states, including Florida, Illinois and Minnesota. This translates into effective fees of about a dollar a day for those who repay on time, which he said was reasonable given the risks and costs of business.

That is a quote from Don Gayhardt, president of the Dollar Financial Corporation, which owns a national chain of lenders called Money Marts. Mr. Gayhardt is also a board member of the Community Financial Services Association of America, a trade group that represents about 60 percent of payday lenders. Mr. Gayhardts’ freedom to contract voluntarily is under attack. Yet, rather than defending his freedom, he kowtows to the seductive big-government snowballers by supporting “fair regulations” that amount to price controls.

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