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Economy / Regulation

Payday Loan Industry in the News

By David Stokes on Nov 18, 2009

Some legislators held a hearing the other day on the harms caused by the payday loan industry. Combest has linked toseveral news stories about the hearing. Although payday loan companies may not be popular, and defending them might not be the easiest road to take, but here at the Show-Me Institute, we have written a few pieces in defense of them.

I think one of the commenters in the Columbia Daily Tribune story accidentally made our point when he or she said that payday loan companies are “legalized loan sharks.” Yes, they are, and if you ban them or regulate them out of existence, they will be replaced by illegal loan sharks. Former Show-Me Institute policy analyst Justin Hauke said it very well in his article when he summarized:

At least with a payday lender, default is settled in court. In the black market, it usually involves a crowbar.

I found it somewhat unbelievable that an economics professor advocated that people who loan money at high rates, because of the heavy risk that this market entails, should go to prison:

In a rebuttal, Bill Black an associate professor of economics and law at the University of Missouri-Kansas City and expert on fraud, said the profit earned by payday lenders is equal to a “giant sucking sound” of dollars headed out of the state. The interest paid to the lenders is money not going to buy groceries, pay utilities or cover rent. It’s a financial black hole, he said.

“In any period of human history other than about the last 15 years, it would have been a crime,” Black said of the lending practice. “And people who charged those interest rates would have been in prison, which is where they belong.”

So, let me get this straight. If two adults engage in a voluntary loan transaction, in a free country like ours, one of them should go to prison? I can’t imagine what other areas of our life Professor Black supports regulating. Based on the above statement, I can’t imagine any aspect of our lives the government wouldn’t belong in. Just terrifying.

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About the author

David Stokes

Director of Municipal Policy

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