Rocco: The first paragraph is ironic. The stuff about payday lenders and not being able to predict the future isn’t.

As you’d expect of your typical vicious fat-cat capitalist bastard, I hate poor people. I absolutely cannot stand the sight of the filthy sods. And they are filthy – what with working down mines and up chimneys. I tell you, if I had my way they’d never emerge from the dark, damp, rat infested holes they call their “homes” to walk the same streets as me, to ruin my mood by their mere proximity.

Yeah, that’s right readers – idiosyncratic titles remain the order of the day. You had your chance to change my mind last week. As no one attempted it, I’m choosing to take that as a sign of approval. So, thank you silent majority!

The truth of the matter is I’m not rich. I’m not well-off. Not even slightly. This is so much the case that I’ve met people who find it quite incredible that I argue for free markets. “How can you support capitalism when you’re so poor?” they enquire. “You’ve got the wrong end of the stick about free markets,” I reply. “Yeah, but dude – you’re so, so poor!” they say. “Alright mate, bloody hell! You don’t have to rub it in!” I shout. Seriously, I’m so poor, readers, that I had to take out a payday loan to buy a typewriter just so I could write for Bogpaper… That bit isn’t true, actually, but it’s the best segue I could think of, so you’ll just have to put up with it.

Payday loans companies are coming under fire again. “Payday loans under fire.” Now that’s a proper title. Why couldn’t I just call it that, eh? “The first paragraph is ironic” – what was I thinking? Where was I? Oh, yeah. According to MP’s, payday lenders are a bunch of smelly poo poo heads. Not only are they exploiting poor people, but get this – and this is absolutely true, I kid you not – they are “grooming” children with their colourful adverts and catchy jingles. Hang on, that last sentence should read: PAYDAY MONSTERS ARE MOLESTING OUR KIDS! Much better.

Leaving aside the ludicrous ‘advertising equals paedophilia’ claim as too silly even for this column, what are payday loans companies doing that’s so bad? Well, what it boils down to, yeah, is that they are lending money to people who want to borrow money – the dicks! Now some might say that the problem is not that they are lending money, but rather, that they are lending money at excessive rates of interest, and that this requires a spot of State intervention. This is nonsense. An interest rate is the price of borrowing money. When the price of something is felt to be too high, that is, ‘excessive’, what happens? People stop buying that thing. If you’re selling something that no one wants because it’s too expensive you don’t stay in business long. Which is to say, the problem, if it existed, would solve itself without need of State intervention. Indeed, insofar as no firm wants to go out of business, they are careful to not price themselves out of the market by charging prices that are felt to be ‘excessive’.

Even so, the interest rates do seem pretty steep. However, the quoted rates are annual percentage rates, yet payday loans are only short term loans – in fact, interest doesn’t compound past sixty days after the initial loan period. This means that those umpteen figure interest rates are completely misleading. So why on earth do these firms quote the A.P.R  figure on the adverts? To comply with regulations, of course.  Nice one, the State! Another thing to bear in mind is that the cost of setting up the loan is included in the interest.

There’s a cliche to the effect of “banks only lend you money if you can prove you don’t need to borrow it”. It’s the sort of thing that passes for a joke on Radio 4. But there’s substance to it because lending money is inherently risky, and lending money to a fellow who ‘doesn’t need it’ is seen as being less risky than lending to a fellow who really does need it. The higher the perceived risk, the more reward (ie, a higher interest rate) that is necessary to convince would-be lenders to lend. If you’ll allow  me some wordplay readers – were the State to outlaw ‘excessive’ interest rates, fewer would-be lenders would be lenders. As for the borrower’s incentive, consider this basic fact of human nature: if you want something right now, you’ll be willing to pay more for it than if you could wait. (This is not limited to exchanges involving money, either. Witness the phenomenon of “settling” in those desperate to get married.)  This is as true for borrowing as for buying, and  just like with buying a good, the more would-be borrowers there are, the more you’ll have to pay: competition on the demand side pushes up the price. Inevitably then, the interest rate (price) on loans for people who are more desperate to borrow money will be higher than for people who are less desperate to borrow.

You don’t have to be over the moon that these firms exist, but the State “getting tough” with payday lenders won’t make life better for their customers. Driving them out of business would only make things worse, because the fact is people use these lenders because they need to borrow money. If people can’t borrow money here, they’ll be forced to go elsewhere, most likely loan sharks. Don’t misinterpret me, there’s nothing wrong with loan sharks. They perform a vital service in lending to people who can’t get credit elsewhere. But the terms of borrowing from loan sharks tend to be much more burdensome than the terms offered by payday loans companies. We might also note that in countries where the State “got tough” with payday lenders (Germany and France foremost) filing for bankruptcy is an increasingly popular pursuit.

What would improve the situation for those with money problems? For the State to stop intervening. Economics is often thought of as a dry, technical, demanding subject. And this is no doubt true alot of the time. But the essential fact of economic life is incredibly simple. There’s no need to invoke an ‘invisible hand’, or any other mystical idea to explain why free markets work, and intervention makes things worse. Here: I own x, you own y. I want y more than x, you want x more than y, so we trade. I’m better off than I was, and you’re better off than you were. Dead easy! It’s only when the State forces you, contrary to your wishes, to exchange y for z, or prohibits us from exchanging x and y, that trade is not a win-win situation. An entirely free market economy would be composed of millions, billions, trillions of acts of the first type. Hence, without State intervention everyone entering into voluntary acts of exchange will be better off than they were. Of course, after an exchange is made either party may later regret their decision, although this tends to be rare in practice. But this isn’t a failure of the free market. No, it’s simply a result of men not being able to predict the future. And no amount of State intervention can remedy that. (Incidentally, mankind’s lack of omniscience is also the real culprit when it’s alleged that some particular group of market participants  – poor people usually, oddly enough! – don’t “act rationally,” and therefore need the State to tell them what to do.)

Now, “better off” is usually taken in the financial sense, and there’s nothing wrong with this. But in the most comprehensive sense it means “being happier”. That is, ‘money profit’ is merely a sub-category of ‘psychic profit’. And this  is what I was alluding to in the somewhat fictionalised conversation above. Yes, free markets allow people to make lots of money, but giving each individual as much chance as possible to improve their psychic lot, without doing so at anyone else’s expense is what they’re really all about. So, you see, it’s no surprise that someone like me should be an anarchist: I’m a nice chap!

On that note, on RGTyler’s “Help BP improve” post – and thank you, to everyone who left a comment – some sort of one page flyer that could be printed off was proposed (by regular commenter dr). As I don’t subscribe to the fiction of intellectual property, let me say that as far as I’m concerned, if anyone wants to re-blog, print off, distribute, copy in part or in whole etc, etc, etc, anything that I write on Bogpaper, they should feel perfectly free to do so.

15 comments on “Rocco: The first paragraph is ironic. The stuff about payday lenders and not being able to predict the future isn’t.

  1. mikebravo
    November 11, 2013 at 2:20 pm #

    Government seems to be happy to lend billions of freshly printed £s to banks at .5% for them to invest in Gov bonds at 3%. If payday loans are so terrible why don’t they set up a payday loan dept via post offices at a nice low %? They could then lock the defaulters in prison and sub them out as cheap labour.
    Brilliant idea or what? – I’m off to the pub for more economic inspiration.

  2. rjmackin
    November 11, 2013 at 2:36 pm #

    In Ireland, with almost 100,000 mortgages in some form of arrears we hear a growing number of borrowers whinging about how the banks basically coerced them into taking out excessively high mortgages and calling on the government to introduce some sort of state-sanctioned debt forgiveness. Similar to the situation with payday lenders, if you enter into a contract and agree to its terms, why should the state get involved?

    • silverminer
      November 11, 2013 at 10:55 pm #

      Normally, I’d agree with you. However, when it comes to the bankers I think people have to right be angry about what’s happened, particularly the Irish.

      First of all, when you enter into a contract there has to be consideration on both sides (basic contract law). If I lent my mate some actual currency and he paid me back with interest then that condition is satisfied (same with a pay day loan company). However, when you take out a mortgage, requiring you to pay interest for 25 years, the bank just creates the money out of thin air with a book keeping entry on their computer system so what consideration did they give? This isn’t a normal contract which I suspect is why they call it a Mortgage Deed, i.e. the word deed indicates that there is unequal consideration. Most people aren’t aware of this so it satisfied the definition of fraud, i.e. intentional deception for personal gain.

      Secondly, the Irish taxpayer bailed out the private Irish banks who, despite having a license to print money, still managed to muck it all up and lose billions. They were not contractually obliged to give the banks a cent yet they are now on hook for the lot and facing 20 years of austerity so the banks can pay their foreign bond holders back.

      Thirdly, the plucky Irish voted no to the Lisbon Treaty which would have killed the “Project” but the sociopaths in Brussels made them vote again! The fiscal union that the Irish have been roped into, which is just a device to make sure the bankers get paid, would never even existed had the first Irish vote been allowed to stand!

      I’m surprised they haven’t had a fecking revolution and drowned the Banksters in the Irish Sea, never mind just whinging about their mortgages.

  3. Roderick
    November 11, 2013 at 4:56 pm #

    The difference between a payday lender and a loan shark is that one of them may choose to ‘interview’ a defaulting customer with the aid of a baseball bat.

    Fully agree with the principle that the state should get out of the way and let market forces operate, to the customer’s ultimate advantage.

  4. duffieldjohn
    November 11, 2013 at 11:05 pm #

    I’m afraid I disagree Rocco. Check out New York usury laws:

    We haven’t got a free market, we’ve got a broken market. Banks will take your money and pay you zip interest, but they’ll lend it out at 5% to you, or not at all. Why should anybody need a payday loan when there’s such a thing as an overdraft? If you really want a free market, then let the Mafia come and compete. Their rates are much better than Wonga’s. But oh no, as ever it’s cosy-cartel rip-off Britain, and our blind-eye tax-take quantitative-easing government is first in the queue. The only time they ever show a bit of hand-wringing concern is when they reckon they can wring a few votes out of it. They’re the people running a protection racket for the Wongas and Barclays and Centricas of this world because they get their cut.

    • Rocco
      November 11, 2013 at 11:31 pm #

      Alright, John. Nice to hear from you.

      I like having a go at corporatism as much as anyone, but quite honestly, man, other than both of them lending money, I’m at a loss to see the connection between Banks and payday lenders. Surely payday lenders shouldn’t be punished for the sins of banks and governments?

  5. jazz606
    November 12, 2013 at 9:39 am #

    Payday are a facility for illegal immigrants and others who either can’t or won’t open a bank account and whose employers ( most these days ) don’t pay in cash.
    They are a vital part of the black economy which is around 15% of GDP.

    • Rocco
      November 12, 2013 at 9:48 am #

      Then in that case, they’re even better than I thought they were!

      • jazz606
        November 12, 2013 at 1:56 pm #

        Yep, I’m all for the black economy…let it rip!

  6. silverminer
    November 12, 2013 at 9:47 am #

    This pay day loans issue is a distraction, a red herring to take the heat off the banks.

    Pay day lenders are just offering a service, lending out their own capital to meet a need for credit amongst desperate people and charging a fee for their services. There are loads of them so it’s not like there is any lack of competition leading to excess profits. No barriers to entry here, no creating money out of nothing. No need for a Banking License for instance. Credit Unions should be doing this work but just look into the hoops you have to jump through to set one of them up. The bankers don’t like competition…

    No, what we need to be asking it how the West, with all it’s wealth and prosperity just a few decades ago, has been brought so low that working people need to use these kinds of services at all. Jefferson gave us the answer a long time ago but we didn’t listen to him:-

    “If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

    We’ve allowed the real economy to be replaced with a financial economy, which is not generating any real wealth, controlled by a psychopathic banking system which is destroying itself and taking us down with it.

    We’re in the liquidation phase so either get used to it or help to do something to change it.

    • jazz606
      November 12, 2013 at 10:26 am #

      Yeah, It’s not as if the payday lenders nearly wrecked the economy.

      • dr
        November 14, 2013 at 11:25 am #

        Or have lots of mates in the government.
        Or fund political parties extensively.

  7. Lord Lunatic
    November 12, 2013 at 10:39 am #

    Good attempt at defending the indefensible, However your argument falls down because we are not currently living in a free market society. For instance we are legally obliged to pay Council Tax and the TV Licence fee on pain of imprisonment whether we want the services of the state or not. Therefore people who borrow from a ‘payday’ lender at usurious interest rates to meet a final Council Tax demand are not making a balanced well thought out decision to participate in our wonderful free market economy.

    • Rocco
      November 12, 2013 at 11:05 am #

      I never said we had a free market. When I mentioned the free market above I said “would be”, I didn’t say “is”. Further, nowhere in anything I’ve written for Bogpaper have I said we currently have a free market.

      However, even under current conditions payday lenders themselves don’t force anyone to borrow from them.

      Also, I have no idea as to why only “balanced, well thought out” decisions would exist in a free market, or what their connection to such a market is.

  8. Lord Lunatic
    November 12, 2013 at 11:42 am #

    Ha Ha Point taken… I was just trying to say amongst other stuff that if it is a choice between a payday lender and a court summons it is not really a free choice, it’s the only option, people are denied credit / overdrafts from mainstream banks due to adverse credit ratings which are quite often damaged by big brother type credit rating agency’s who record all late payments of energy bills etc…

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