Oi, Big Government! Leave Wonga ‘A-loan’!

Wonga

Richard Elliott defends payday lenders from the spectre of big government regulation.

This Monday, Britain was informed of the first plans by the government to introduce new regulations to cap the interest rates of the notorious ‘payday lenders’. The loans, provided by familiar high-street lenders such as Wonga.com and Mr Lender, will receive a cap in the rates that they can provide (the amount of which is as of yet unspecified). The cap will prevent payday lenders from charging their own rates on the money that they lend.

Some may see this intervention by government into the free market as a necessary evil; many figures on the right, the left, and many points in between cite the occasionally extortionate rates of interest on payday loans. They use this as evidence for the view that something needs to be done to curb the possibility of people running themselves into heavy debts and financial trouble.

I hope that no rational classical liberal or libertarian thinks this is a good excuse.

Why not? Well, for lots of reasons. Here’s a few of them.

1) It punishes responsible borrowers
How many people use payday loans in this country? Well, we can’t be precisely sure. But statistics show that the number of individual customers has run into the millions. Low estimates suggest 1.3 million, and the higher end suggests up to 2.4 million. We also know, quite evidently, that there are not between 1.3 and 2.4 million people in Britain accumulating high-rate debts from mainstream lenders.

What does this show? That the majority of customers are wise enough to borrow responsibly.

A small minority of people (who happen to receive the bulk of the press coverage) that aren’t so responsible, and who borrow too much for too long, are being stretched as a statistic over the entire demographic of borrowers, in a direct manipulation of the facts for political purposes. By making the exceptions appear to be the rule, and legislating accordingly, the many who borrow responsibly and within their means are being punished for the mistakes of the irresponsible. What is fair or just about that?

2) More red tape, bigger government
This is the oldest libertarian principle.
More regulation = more red tape,
More red tape = more state paternalism,
More state paternalism = bigger government,
Bigger government = higher government expense, and more unnecessary authoritarianism.

3) It damages the economy
I am not an advocate of the work of Ayn Rand, but one thing she got absolutely spot-on was the need to smash the gigantic myth that entrepreneurs must be punished for their success. If Wonga is the most entrepreneurial end of the market, then that is all the more reason it deserves our defence.

We should stop crushing the entrepreneurial spirit in people to make money for themselves! If people are entrepreneurial without government or statutory interference, they behave more morally and produce a cost-effective end result. Why would you not want to encourage that?

4) It hurts the people who need to use them most
Payday lenders provide a valuable service, allowing individuals to cover themselves when they cannot do so by other means. With lenders’ incentives significantly diminished by government interference, many such companies will be less willing to lend, due to less profitable intake. This will inevitably lead to the people who need money lent to them not being able to get it. They will suffer needlessly.

5) Government don’t know how to spend your money better than you do!
Trust me. MPs are not magical angels that possess infallible knowledge about the best way for you to spend your money. Just look at the state of the economy: the rising debt rates, the looming deficit; does this look like a crack team who understand the fiscal sphere? The answer is a resounding no.

Why not let individuals make up their own minds regarding what they do with their own money?

(A small aside: how funny it is that we have seen Nadhim Zahavi, MP for Stratford-Upon-Avon, on a Select Committee recently, grilling CEOs and representatives of mainstream payday lenders of Mr Lender and Wonga, when this is the man who is more fiscally irresponsible than any Wonga customer? This man was recently discovered to have spent more than £5000 on his second home energy bills, via the pockets of the taxpayer. Who is he to lecture young people, bright businessmen or women on how they should invest their own money, when he invests the money of the taxpayer for his own comfort?)

6) Regulating rates encourages people to be irresponsible
It is important to recognise that there are already licensing procedures in place to ensure that no ‘loan shark’ style lending is done. The Office for Fair Trading issues consumer credit licences to borrowing firms. That’s right: a government office has, until this immense public pressure, called mainstream payday lenders “fair”.

This is yet another issue where libertarians can hold the moral high ground.

Sometimes, the money doesn’t stretch all month. It’s good that companies like Wonga are there for that last week when the bills are due, and there is no other way to cover it. But if someone is prodigiously borrowing, there should be a little social responsibility and compassion by friends or relatives to say ‘No; that ain’t good. Spend less straight after payday, so your money stretches the month. Everyone else does it that way’.

We should encourage voluntary fiscal responsibility. If the paternalistic government treats people like ignorant children, then we will become a nation of ignorant children. Borrowing money should never be treated lightly; capping interest rates undermines the seriousness with which people should treat their financial decisions.

So, what’s the moral of the story for government? Leave Wonga a-loan!

3 COMMENTS

  1. Payday Lenders are lenders of last resort. They lend to people who are unable to access mainstream borrowing because they are poor credit risks. As such, they expect an enhanced return for the higher risks that they are taking – as is normal in any lending organisation.

    Regulate them to the point where their business model is nonviable and they will find something better to do with their money – leaving desperate people unable to access borrowing when desperately needed, or resorting to loan sharks who are completely unregulated and have rather more questionable practices.

    Or perhaps we would see a major resurgence of pawn brokers? And/or a proliferation of those companies that cash cheques same-day for a significant fee, for people who can’t/won’t wait for a cheque to clear?

    Payday lenders can be a sensible source of short-term funds for responsible borrows in short-term difficulties, who have the money coming in to repay. As with any form of finance, they will be abused by the financially irresponsible – just like cheque cashing and pawn broking. That’s why they charge high fees to defaulters.

  2. Fantastically ahistorical and delusional piece of writing. You obviously have no idea why payday loan companies exist and why people use them. It’s not because they are ‘irresponsible’ and completely oblivious to the fact that other cheaper credit exists – it’s because Wonga et al are literally the only lenders that will offer them credit. You know no political economy or anything about how capitalism actually functions and impacts on people’s decisions on a daily basis. Going into a debt is not a choice, it’s a fucking necessity (for loads of people, maybe even including you http://www.bbc.co.uk/news/business-25108891 ). Nor is it a sign of personal failing or lack of fiscal responsibility or people ‘living beyond their means’, or any other banal sado-monetarist jargon you’d care to regurtitate. You seem to value ‘voluntary fiscal responsibility’ more than things
    like people continuing to live in houses, being warm or eating
    occasionally. As if maintaning our individual financial equilibriums is more important that actually continuing to exist. The idea that mass indebtedness and catastrophic living and working conditions are a result of the immoral/irresponsible/moronic behaviour of individuals, rather than a structural dynamic that means reliance on credit and debt are literally the only form of viable ‘existence’ on offer to for a large swathe of population is plainly absurd.

    Also quite hysterical how your small-government libertarianism manages to accommodate baseless assumptions like ‘current government regulations must be totally sound because they exist’: “It is important to recognise that there are already licensing procedures in place to ensure that no ‘loan shark’ style lending is done.” That’s a fascinating definition of loan sharking that doesn’t include 6000% APR lending. Quite embarassing.

    Please just try and think a bit.

  3. While the reasons you have raised are valid, unfortunately I find them incredibly theory-laden and discounts the real legitimacy to intervene in this market:

    Loans work when you borrow money, agree to pay it back within a certain length of time and with a certain level of interest. Companies like Wonga charge extortionate interest rates to ensure that the person who takes out the loan are constantly in debt and thus make money through exploiting these vulnerable people and getting them to constantly keep paying them more money that goes far beyond the original loan.

    Now the government not only has real legitimacy to defend the weakest in society by regulating these loans since they are horrificly exploitative, but they also have a real need to intervene to manage capitalism. Such a loan system is unstable, for instance if you take out a loan at a ratio of 100:1, 99 extra money need to be created through a form of quantitative easing to pay the loan back and thus this pushes up the rate of inflation if it occurs on a large scale. Inflation at the moment is pretty high and companies like Wonga help spur it on.

    If people cannot pay the loans back and they declare themselves bankrupt this will also have a knock on effect as we will need more bank bailouts to cover the cost of this lost money (it is a well known fact people borrow more money to pay back companies like Wonga). When bailing out these companies/banks once the system collapses, this will cost the state a huge amount of money and therefore the economic argument you utilise is only short-term rather than considering the bigger picture.

    Yes to regulation- to protect vulnerable people and protect the system.

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