Payday lenders have often been accused of taking advantage of consumers by charging exorbitant interest rates to low-income consumers who borrow from them.  Some proposed legislation, including a referendum on the ballot in Montana, seeks to cap the annual interest rate payday lenders and certain other lenders may charge to 36%.

The argument for the legislation is that low-income consumers are taken advantage of by payday lenders, who charge interest rates as high as 400% per year.  This argument is somewhat persuasive in that low-income consumers going to payday lenders often lack financial savvy and fail to understand the ramifications of taking on a high-interest loan and then failing to pay it back promptly.

The contrary argument, which I find more persuasive, is that a cap on payday loan rates will drive payday lenders out of business, and thus eliminate the payday loan option for consumers who truly need payday loans.  John Koppisch at Forbes.com writes:

Payday and other non-bank consumer lenders take tremendous risks handing over money to customers they often don’t know and who have a very high default rate. These lenders don’t have the FDIC or TARP safety net enjoyed by banks. They need to look the borrower in the eye, size up their employment record, financial situation and sincerity, and then make an educated guess on whether they’ll see their $75 or $2,000 ever again.

In other words, payday lenders take massive risks on making loans to customers who walk into their office on short notice and with financial emergencies necessitating a payday loan.  Risk is costly, which is why loans always cost more money when they are for riskier borrowers.  Payday lenders don’t charge low interest rates because many of their borrowers default – far more than those who borrow through more traditional loans.  To make up for the loss, payday lenders must charge higher interest rates.  A payday lender may make a large profit on one payday loan, but much of that profit is likely to be used to offset the losses from defaulted loans.

If the amount of interest a payday lender can charge is capped, then to make the same amount of profits, a payday lender will have to hope that far fewer people default on their loans.  That won’t happen.   Instead, payday lenders’ profits will shrink, likely so far that they’ll be pushed out of business.  Koppisch again:

Laws like this usually end up putting dozens of mom-and-pop outfits out of business and sending hundreds of employees to the unemployment line. Expecting the measure to pass, nationwide chains such as Advance America have already closed outlets in [Montana]. The interest rates allowed are just too low to cover the losses from deadbeats. In 2008, a 24% interest-rate cap took effect in Washington, D.C. and soon every licensed payday lender had disappeared from the market and such loans were no longer legally available anywhere in the city. A 36% cap began July 1 in Arizona, forcing many payday loan companies to shut down.

The idea of capping payday lending rates is heavy-handed, misguided legislation.  A better proposal would be to require payday lenders to provide clear information on the costs of each payday loan to each consumer.  If consumers are fully aware of the costs of a payday loan, there is no good argument why they should not be allowed to obtain one.  Clear language in payday loan contracts, brochures, and interactions with consumers would be far more helpful than a cap on interest.

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The following is a guest post by Jack.  You can read his blog here.  This post represents the views of the author and not necessarily the position of George of gimme-five.com.  Thanks, Jack!

In another clear attempt to reduce our carbon footprint, Minister Jacinta Allan joined Caltex and GM Holden to publicize a distribution of fuel containing up to 85% ethanol across Caltex’s set of connections, including Victoria, by end of October, 2010. E-Flex, is Caltext’s ethanol based bio fuel that will hopefully cut carbon emissions down by 20% in 2020. The fuel, referred to as “home grown ” will ultimately improve Victoria’s fuel security. Ms Allan boldly states that it will also “stimulate investment in local supply.” The fuel itself has the ability to reduce carbon emissions up to 50%; this is in direct comparison to traditional fossil fuels.

The promotion of efforts like this, along with the implementation of green jobs, was all a part of Brumby Labor Government’s $175 million jobs for the Future Economy Action Plan.

Carbon Cutting projects like the example listed above provide greater sustainability. Accordingly, the introduction of ethanol based bio fuels are a step towards a more optimal supply of renewable energy. Ms Allan goes on to state that they’ll continue to work tirelessly to build a plant for high-tech ethanol production in Victoria.

Meanwhile, Doug Band and the Clinton Global Initiative continue to invest in similar sustainability projects, similar to the fleet emission reduction program in San Francisco Bay. The plan will effectively lower green house gas emissions from specific vehicle fleets of the county through fleet route optimization. In other words ESRI and the CGI are deemed responsible for developing software that will optimize fuel usage.

Both projects are a step in the right direction. With the development of things like PETE (photon enhanced thermionic emissions), and less expensive, more efficient alternative energy projects in place, the world will continue to become a more sustainable planet.

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The following is a quote from Adam Smith (the economist) that I had never read before.  It’s a very apt way of describing a vast majority of politicians and “political” people in the modern era.  Though the quotation is quite libertarian, I think it applies just as precisely to Tea Partiers (who aren’t necessarily libertarian, but often portrayed that way) as it does to hard left Democrats.

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

For an interesting article applying this quotation, see this excellent article about a terrible proposed law.

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A few minutes ago, I got a phone call from the Democratic party, asking for money.  The conversation went something like this:

Caller: As you know, the new healthcare legislation passed.  However, Sarah Palin and the Republicans, are saying extreme things about it to make everyone hate it.  They’re calling it socialism instead of debating the facts.  And they’re raising a lot of money to fight it.  If you donate to us today, we’ll triplicate your donation.

Me: I’m sorry, I really do not want to donate.

Caller: But don’t you dislike what the Republican party is doing right now and what Sarah Palin is saying?

Me: Sure.  I can’t stand Sarah Palin.

Caller: Don’t you see how important this is?

Me: I really don’t support major political parties.  They’re too extreme for me.

Caller: Don’t you know that President Obama has been described by some as a centrist?

Me: Sorry, the reason I don’t donate is because I think political parties make issues too polarized in this country, not because of the characteristics of individual politicians.  I’m sorry, I really do not support you.

Caller: OK, well maybe we’ll get you on board sometime in the future.

Me: Thanks, bye.

Since I’m a pretty passive person, I don’t like to say mean things to people on the phone, so obviously I did not do so with this conversation.  But the conversation really exemplified what I do not like about political parties.  The caller assumed that if I disliked the Republican Party’s extreme tactics, then I would surely prefer the Democratic Party, and seemed to be confused as to how I could dislike the Republican Party and not like the Democratic Party.  In fact, the whole conversation was a bit of irony.  The caller was accusing the Republicans of using improper debate tactics, but was essentially making a straw man argument by lumping all of the Republicans in with Sarah Palin and crazy people that use the word socialism instead of debating the facts.  Sure, lots of Republican politicians did that, but it was certainly not everybody.  And not all Republicans are as radically incompetent as Sarah Palin.  I told him I don’t like political parties because they’re too extreme—I dislike political parties just as much for their straw man arguments as I do for their hyperbolic accusations.

File this under reason #492 why I dislike political parties.

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The new healthcare legislation has apparently made some people so made that they’ve turned to threatening politicians with violence.  Some citizens have also decided to battle it out amongst each other, including the driver who was so mad that he started a car—while driving—because it had an Obama-Biden sticker on it:

Duren had picked his daughter up from school and was driving to his Nashville, TN home when Harry Weisiger pulled up next to his car, pointed to the Obama-Biden bumper sticker on the back, and flipped him off . . . . At a stop sign he starting honking his horn and causing a scene and when the two were underway again, he hit Duran’s car. Being a normal person, Duren slowed to deal with the accident but Weisiger sped up and smashed into the bumper, causing serious damage.

My two cents: if someone is stupid enough to turn to violence about a political issue, they likely don’t have the intelligence to actually understand the political issue itself.

P.S. This is NOT an endorsement of the healthcare legislation, of which I have many doubts.

healthcare, Politics