There’s a short
but sweet debate over at Business Week today between two prominent econobloggers,
Nouriel Roubini and Tyler Cowen. The question
is whether the US government should place greater restrictions on car sellers,
pay-day lenders, and tax preparers who offer the working poor cash or credit
with high fees and interest rates. Roubini says yes, it should. Cowen says no,
it shouldn’t. Roubini is right.
Roubini, a famous housing bear, concentrates, as is his wont, on subprime mortgages.
I’m happy to see those restricted, but I don’t think it would make the slightest
bit of difference – because few if any of them were written at usurious
interest rates. The problem was that people were buying houses they couldn’t
afford, not that banks were charging them exorbitant interest. (In fact, the
banks are losing money on those loans, which means they’re not exactly profiteering.)
The real scandal is not with subprime lenders but with payday
lenders. Many of these are geniunely predatory and should be curtailed.
Cowen approaches the debate from the standpoint of a theoretical economist.
"There are hundreds or thousands of lenders competing to give borrowers
the best deal possible," he says, setting up a utopian world which simply
does not exist in reality. Insofar as paday lenders compete, they don’t compete
on price: they compete in terms of having convenient locations which are open
very late and very early, and which don’t ask nosy questions about the borrower’s
income or immigration status.
In any case, the number of payday lenders in any given location is hardly in
the triple digits, let alone the quadruple digits: indeed, I’d be most surprised
if it was even in the double digits. Payday lenders tend to have tiny little
hyperlocal monopolies, a bit like corner delis in New York: you just go to your
nearest one.
As a board member of my local community development credit
union, I feel obliged here to point out that CDCUs nearly all offer vastly
superior alternatives to payday loans – at least as far as their financial
terms are concerned. Tyler’s wrong that the interest rates charged by payday
lenders are necessary because the borrowers are bad or unknown credit risks
– he just needs to look at his local credit union to work that one out.
The problem, of course, is that credit unions find it very hard to compete in
terms of having convenient locations and long opening hours. But they are, always,
a much better way to go.