ANALYSIS / OPINION:
The New York Times is once again on the warpath against what it calls “predatory lending.”
What are predatory loans? It’s the loans that charge a higher interest rate than people like the New York Times approve. Based on that thinking, or lack of thought, the answer is for the government to set a ceiling on interest rates at a level that is acceptable to third parties like the New York Times.
People who believe in government-set price controls – whether it’s on the interest rates charged on loans, the rents charged for housing, or the wages paid under minimum wage laws – seem to think that this is the end of the story. However, there is a large literature on the economic repercussions of price controls.
Comprehensive books have been written on the impact of rent control laws in countries around the world. These repercussions include the housing shortage that almost invariably follows, the deterioration of existing housing and the displacement of economic resources, both construction materials and labor, from the construction of ordinary housing for the general public to the construction of luxury homes that only the rich and wealthy. you can afford, because that type of housing is generally exempt from rent control.
There is at least an equally extensive literature on the implications of minimum wage laws. Unemployment rates above 20 percent for younger, less skilled, and less experienced workers have been common, even in normal times, with unemployment rates much higher than during recessions.
In this context of negative repercussions of various forms of price controls in countries around the world, why would anyone imagine that price controls on interest rates would not have repercussions that must be considered?
Yet there is very little concern on the political left as to the real consequences of the laws and policies they advocate. Once they’ve taken a stand on the angels’ side against the forces of evil, that’s the end of the story, as far as they’re concerned.
Low-income people often take out short-term loans when they run out of money to meet current demands. The interest rates charged on these unsecured loans to people with low credit scores are typically higher than on loans to people whose higher income and better credit history make them less risky.
Crusaders against such loans often make the interest rate charged appear even higher by quoting these interest rates in annual terms, even when the loan is actually repayable in a matter of weeks. It’s like saying that a hotel room at $ 100 a night costs $ 36,500 a year, when virtually no one rents a hotel room for a year.
Because unsecured short-term borrowers are often poor and often ill-educated, the political left may view high interest rates as taking advantage of vulnerable people unreasonably. However, similar economic principles apply to more exclusive short-term loans for well-educated individuals who have valuable possessions to use as collateral.
A small-time entrepreneur who suddenly finds that he does not have enough cash on hand, or that it is not available in a bank, to pay his employees this week, knows that if he does not pay them this week, he may not have employees. next week, and you may face lawsuits the following week.
There is a high-end loan market available to such people, where you can use your expensive personal possessions as collateral to get the money you need right away.
You can borrow more money than the poor can borrow, and at a not-so-high interest rate. However, your interest rate can still be 200 percent, if calculated on an annual basis, although you may be able to pay off the loan next month when your clients pay you what they owe you. Consequently, you are paying only a small fraction of that hypothetical 200 percent, just as the poor are paying only a small fraction of the hypothetical 300 percent or 400 percent that they are charged.
Editorial demagoguery against âpredatoryâ borrowing could well be called predatory journalism: taking advantage of other people’s ignorance of the economy to score ideological points and promote an even greater expansion of government powers that limit the options of the poor especially, who already they have few options.
Thomas Sowell is a senior fellow at the Hoover Institution at Stanford University.