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!