Sunday, April 15, 2007

Today's episode of Is she really stupid or just playing politics? comes thanks of Linda Singer, the Attorney General for Washington DC, who gets up on a soapbox to bemoan the 'high cost of being poor' in DC (yes, there's a bit of an oxymoron there...).

Singer doesn't like payday loan companies (lending money to someone until they get their next paycheck), rent-to-own companies and businesses that provide check cashing services for people lacking bank accounts. She complains that the people who use these services pay a high effective rate of interest on an absolute basis and, in particular, higher than that paid by people who aren't poor.

I could start by saying that nobody is forcing these people to use these busineses, that they do so fully aware of what it is costing them and they do so because they, in the case of payday loans, don't want to wait until their next paycheck to have some cash in their pocket, or, in the case of 'rent-to-own', they would rather pay a little for a long time than to make a large upfront payment (with cash they don't have). But Singer, as all good liberals, would simply respond that these people aren't doing this out of free choice, that they have no choice and they're being preyed upon by unscrupulous businesses.

Her solution? Well, as a good liberal, her solution involves passing new laws.

One law would require businesses to better disclose the interest rate they charge. But if, as she alleges, people use these services because they have no alternatives, what difference would it make if the interest rate was tatooed (backwards) on their foreheads so they would see it every time they looked in a mirror? She really ought not try to argue that people have no choice but to use these services at the same time she's arguing they would go elsewhere (or, presumably, bargain down the rate) if only they were better informed as to the rate they were being charged.

A second law would cap the effective interest rate businesses could charge for certain services. Here she demonstrates a lack of understanding of economics. There are no shortage of businesses offering these services, so presumably no business is now able to charge a premium for their services (were they to try, customers would flock to the business charging less... and, while the customers may not be able to calculate the APR to the sixth decimal place, they know very well how much they're being charged to borrow money). Capping the interest rate charged would depress the number of businesses offering such services, as the less efficient or those with higher costs of capital would cease offering those services, and lowering the amount of money available for customers to borrow. With less money available to loan and at lower rates, the effect would be for businesses to cut off those customers with the shakiest (of the already shaky) credit... leaving some number of customers unable to legally borrow money, which in turn will drive up the demand for illegal lending (with, as we all know from watching TV, much higher interest rates and less forgiveness for those paying late than is now the case). Now maybe Singer thinks people would be better off if these outfits didn't exist, but if that were the case, why not ban them altogether? By proposing rate caps, she is ensuring that the weakest of the weak get shut out of the market... and just how is this doing them any favors?

She also calls for mainstream banks and credit card companies to start lending in poor neighborhoods. It amazes me how liberals can demonize companies, such as banks and credit card companies, for being greedy and at the same time, basically accuse them of passing on an opportunity to make money. Doesn't it occur to her that the reason mainstream banks and credit card companies aren't already lending into poor neighborhoods is because they don't think there are profits to be made? Does she really think that the local banks aren't aware they don't have a strong presence in certain neighborhoods, and that they would rush to open branches in those areas once someone such as herself pointed this out?

I find it really hard to believe that anyone who went to law school could be so clueless about the real world. She is as wedded to her abstract theories about evil business/stupid poor people, and as incapable/unwilling of recognizing what really is happening as Bush is when it comes to what is going on in Iraq. In Bush's case, I have no problem attributing his difficulties to his not being very smart. Here, I'm just not sure.... is she stupid? or just blind? Your call...