Tuesday, May 16, 2017

A Lesson in the Crucial Distinction Between Economic and Political Power

Payday lending is a form of ultra-short term, unsecured credit available, for a fee, to people who desire money before their next paycheck, at which time the loan is repaid. Some people don’t like these types of loans, and want them restricted or outlawed. Last year, Google banned advertising by any lender charging an annual percentage rate (APR) of more than 36%. Since payday loans are ultra-short term, their APRs can be astronomical, even ranging into the hundreds of a percent. Of course, since payday loans are intended to be paid back within days, no one actually pays the implied APR on any single loan. So analyzing payday loans based on APR is irrelevant.

But Beverly Brown Ruggia, the Community Reinvestment Organizer at New Jersey Citizen Action, praised Google’s new policy. In a New Jersey Star-Ledger guest column, Google did the right thing to protect N.J. from predatory lenders, Ruggia wrote:

Google delivered a significant victory for consumer financial protections in New Jersey last month, when it announced it will no longer permit lenders to advertise payday loans or any loan with an APR that is more than 36 percent on its website.

Ruggia hates payday loans. She paints with a broad brush, smearing all payday lenders as “predatory,” and all of their customers as helpless incompetents incapable of using the practice responsibly. This is typical of our busy-body “consumer protectors.” But she of course is entitled to her opinion. Unfortunately, she doesn't stop at praising Google. She wants to use the government as her hired gun to impose Google-like restrictions, and then some, on us all. She praised the states that legally ban payday lenders, as well as the new Dodd-Frank Consumer Financial Protection Bureau’s (CFPB) proposed new regulations for payday lending nationwide.

But she doesn’t think CFPB’s regulations go far enough. She claims that rates are too high, and many irresponsible payday borrowers “are caught on a hamster wheel of renewals.” She also claims that payday lenders often engage in deception. But high rates and irresponsible borrowers are entirely different from deception.

New Jersey is one of the states that bans payday loans. But residents can easily get around the ban by securing loans online. Google’s advertising ban makes that end run a little harder. But Ruggia demands new nationwide laws and regulations against the industry, not just against rights-violating practices perpetrated by specific lenders in specific instances. Like all regulatory actions, such government intrusions punish the innocent for the actions of wrong-doers, kind of like throwing out the baby with the bathwater.

I left these comments, slightly edited:

Google may or may not have done the “right thing.” But, as a private enterprise, it has the right to do it. But government, being a rights-protecting institution based on force, has no legitimate right to regulate or ban payday loans. The difference between economic power (Google’s voluntary action) and political power (government coercive regulation) is as different, both morally and in practice, as day versus night—or persuasion versus a gun.

Government’s job is not to restrict commerce and trade. It is to protect us against fraud, including deceptive advertising and the like. If there is any of that going on in the payday lending business, then government should step in. As long as the loans are made by voluntary agreement and mutual consent in the absence of fraud, the government has no right to interfere. The fact that some number of people act irresponsibly is no justification. Let them learn from their mistakes. Individual rights to freely engage in trade, including lending and borrowing, should never be infringed or restricted because some people use their rights irresponsibly. By that standard, no freedom can exist.

Speaking of fraud, one of the biggest frauds is the idea peddled by statists that government regulations are for so-called “consumer protection,” when in reality what they are doing is restricting we consumers’ freedom to make our own choices. Government’s only job is to protect every individuals’ rights equally and at all times. Lenders have the right to offer these short-term loans on their own terms, and obviously have uncovered a market demand for such loans. But consumers have the right to decide for themselves whether to purchase them without interference from government bureaucrats or politicians. Government regulations like these don’t protect consumers. Protection from what? From our right to act on our own judgement. They simply reduce our liberties and our opportunities.

Related Reading:

One of the few lending options available to the poor may soon evaporate.

Where Does Valid Law End and Regulation Begin?

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