Tue, 10 May 2005

No thanks, Elliot.

A week ago, Elliot Spitzer, New York State's current Attorney General and Governor-elect (in his dreams), put out a press release explaining how he was saving New Yorkers from being able to borrow money. He didn't put it that way, but I do. He thinks that he's saving New Yorkers from high interest rate (payday) loans.

I don't think Elliot understands interest. There is a competitive market for loaning money to people with no capital. It is a very competitive market, because the product being rented is absolutely identical. You don't have to take the money to the shop to have a mechanic examine it for defects. You know that $500 at 150% interest is cheaper than $500 at 200%.

In a competitive market, holders of capital wish to earn a fair rate of interest on it. Ahhhh, but what is "fair"? Consumers decide what is fair. A business makes an offer, another business makes another offer, and yet another another. The consumer chooses the offer that is best for them. This keeps the businesses honest and fair. Businesses that aren't honest and fair are competed out of business.

Or, rather, there would be a competitive market, except that New York State chooses to interfere in it. New York State caps the interest rate for payday loans to 16% per annum. This doesn't make the market go away, it just sends the market over to the Mafia. No doubt Elliot Spitzer thinks that he's fighting organized crime. So odd, then, that he takes actions which create new profits for the Mafia!

The nature of interest is such that you cannot dictate the value of it. If you try to cap interest rates, you can only have two effects: people who need money won't get it, or they'll get it illegally. Either way, no positive effect is created from this law. If Elliot Spitzer were an honest man (but alas, he is a politician), he would refuse to enforce this law. Certainly there are more than enough laws that he can pick and choose among the ones he wishes to enforce. Too bad for the citizens of New York State that he has chosen to enforce this one.

UPDATE: TM Lutas points out that people are desirous of usury laws, and that consequently we need to pander to that desire. Nope. People also desire to commit suicide. Does that mean we should hand them a gun? Of course not. People need to learn that interest is a characteristic of the world, just like 32ft/sec/sec. If you step off a cliff, you're going to get hurt. If you want to borrow money and you have no or worse credit, you're going to have to pay a lot of money. Would I that it were otherwise? Of course, but neither do I think that everyone should have to walk around covered with foam rubber so they don't get hurt from falling. If we did that to children, they would never learn to avoid falling, because falling wouldn't hurt. They would be handicapped relative to a normal adult. We shouldn't treat adults like children.

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