Regulating Payday Loans

Earlier this year, Obama signed into law new cash advance lending laws designed to make it more difficult for these lenders to do business, and make readily available cash less available to poor Americans.  This video from Reason gives a good overview of the issue and the positions of those for and against the new law:

Being a pretty thoroughgoing conservative, I’m reflexively against this sort of law.  But then again, I was at least lukewarmly in favor of a similar new law passed last year, the Credit Card Act.  How can I be in favor of one and not the other?

Perhaps because credit cards have become a fact of life, for one thing. It would take a concentrated act of will to go without one. One would be ill-advised to make any large purchases, or any online purchase, or to travel by making use of cash or ATM cards instead of credit cards.  Credit cards, so long as the balance is paid off each month, act as a free layer of security and insurance to the consumer.

But the impacts go beyond the merely practical.  Paying for everything in our lives—not just big ticket items, but groceries and gasoline and Sunday trips for an ice cream cone—comes to have a significant impact on our values toward money, and toward products and our consumption of them.  Not just economically, but psychologically and socially.  There’s something perhaps unnatural about buying on credit.  We’re using stuff we haven’t paid for yet, which can add a layer of complexity in dealing with tight family budgets.  We have to plan to fork out a wad of cash not only for next month’s rent/mortgage, but also for last month’s ice cream cones.

Yet, despite all their vagaries, credit cards have become a part of American culture.

Given all that, I think it’s justified when it comes to credit cards to choose to give up some of the bargaining rights we hold as individuals, in order to establish and fortify a set of baseline values concerning this pervasive economic institution on which we all depend as a people.

Though, if there’s any merit to the foregoing, it still would have nothing to do with the cash advance industry.  Relatively few Americans depend on them, and thus it cannot be said they are part of the our culture in the way credit cards are.  And the purpose for the new law are designed to restrict and crush the industry, not regulate or normalize it—probably a presumptively bad legislative purpose to begin with.  People may come to depend on cash advances because they’re bad with their money (not a good reason to undermine lenders’ economic freedom) or because they’re just poor (arguably a better reason). But the solution should come by way of improving the borrowers’ economic position, not by stripping others’ economic rights.

Credit Card Regs’ Cause and Effect

Hans Bader reports on some of the provisions recently made effective by the new Credit Card Accountability Responsibility and Disclosure Act of 2009.

In response to the new law, some credit card companies are starting to charge annual fees on their credit cards to protect themselves against potential losses. Others will likely drop their rewards programs, or stop giving customers’ percentage rebates on credit card purchases. For example, I and my wife get 3% to 5% back on most of our credit card purchases.

One of my co-workers just emailed me that since the new law, he will now be charged an annual fee on what he calls “the best reward card I ever found.” It’s the same card I use for many of my purchases.

The new law is supposed to “protect” cardholders. But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, (or have good enough credit that the credit card company would not likely have increased their interest rate anyway) to people with bad credit who have run up big balances.

Let me say something very un-conservative and un-free-market about this: maybe it’s not such a bad thing that there’s less money to be made in credit cards.  It’s strikes me a rather unsavory business.  Credit cards are wonderfully convenient, but I can see no great fall-out if consumers are no longer able to get “rewards” from using the cards, or have to contend with a lower credit limit and have to pay (gasp!) cash for some things or get a loan for larger purchases, or if it is no longer free or easy to hold three, four, …, a dozen cards.  The proper understanding and use of credit is such a tricky yet vital thing in modern life that it seemed inevitable that either mandatory education, or regulation, on the business would be necessary.

H/T Volokh

Obama’s Push For Credit Card Legislation Could Use Less Demagoguery

I’ve noted elsewhere that, though I’m generally a supporter of free markets and freedom of contract, I think credit cards are something like an “attractive nuisance.” The present upsides are too enticing, and the latent traps are too understated. The credit card is an unnatural, unholy beast to begin with, so I have little problem with regulating them.

So, if it’s so easy to bash credit cards, why does Obama feel the need to conscript “rights” talk into his rhetorical campaign against them? Fox News reports that, just today, Obama said:

Americans . . . . have a right to not get ripped off by the sudden rate hikes, unfair penalties and hidden fees that have become all-too common.”

Certainly, “ripped off” is a self-serving term. If credit card companies were really ripping people off–i.e., breaking their contracts–they would be liable for, well, breach of contract, and we wouldn’t need new legislation. What he’s really getting at is that credit card companies shouldn’t be able to structure agreements that allow them to hike rates the way they do. And perhaps they shouldn’t.

But there is no “right” that any of us have to be able to have credit cards with terms all to our liking. At least, not until Obama and his Congress give us one. It is this loose talk about “rights” that keeps us all inebriated with a sense of entitlements–to afford an unwieldy mortgage, to have broadband internet, to full-coverage healthcare, etc.