There they go again — price controls

New Mexico cannot get over its anti-market mind set. Now big Bill wants to impose price controls in the form of caps on payday loans (subscription):
“Gov. Bill Richardson says he’ll introduce a measure to the Legislature this week that will cap interest rates on payday and car title loans.
‘I’m going to enter the fray and propose a bill of my own that sets a reasonable cap,’ Richardson said Sunday in a telephone interview.”
I have seen only a little skepticism on this bad proposal. Why is it bad? Let’s answer the question by asking some questions.
1. Since there are so many payday lenders, how can it possibly be that they are charging too much for their loans? Wouldn’t an exorbitant rate of profit lead to even more lenders, driving down the charges for payday loans?
2. Similarly, why don’t those who say that payday lenders charge too much enter the market themselves and charge something more “reasonable.”
3. Undoubtedly there are a few borrowers who are misled by these loans. But with all the overbearing regulations now existing, why isn’t our government catching those who commit fraud? Isn’t detecting and prosecuting fraud one of the main reasons we have a government? Why do we want to drive this market underground where fraud will be even more difficult to detect and prosecute?
4. What is so hard to understand about the terms of these short-term payday loans? Example: Lender lends $200 for two weeks with a charge to borrower of $30. Even a borrower educated in NM should be able to understand that.
5. Why do we want to penalize borrowers who act responsibly and will get shut out of the market as a result of this bad proposal? They will suffer more when financial emergencies occur than they would with a payday loan – otherwise they wouldn’t be seeking the loan.
6. Proponents of this bad law are making a big deal out of converting the payday loan charges to an annual rate of interest. But they don’t include the value to the borrower of being able to obtain the loan hassle-free. Why not?
One thing we economists know is that price controls always make matters worse. This bad law will too.

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One Reply to “There they go again — price controls”

  1. We should also ask about the risk these payday lenders face in giving loans to a segment of the population much more likely to default than your average home mortgage borrower. Lenders need to make enough money from people who do pay back their loans to cover the losses of those who don’t. Many payday loan recipients cannot even open checking accounts at local banks, who judge them too much of an overdraft risk. A thriving fee-charging check-cashing business has sprung up to serve those denied checking accounts at banks, and they’ll likely be the next target of the anti-market goons in Santa Fe.
    It’s okay for banks to discriminate against high-risk potential customers, but heaven help the businesses who do meet their needs, balancing greater risks with higher costs. Consumers will be “protected” by not being able to get a loan in the face of a financial emergency, and eventually by not even being able to cash their own paychecks.

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