You can’t accuse Donald P. Morgan and Michael R. Strain of being on the payroll of the payday lending industry. They are staff economists of the Federal Reserve Bank of New York. That’s why we need to pay attention when they conclude in a November report, “Payday Holiday: How Households Fare after Payday Credit Bans,” that payday lending is less burdensome on the poor than cutting off their credit.
Do Gooders have trashed the payday lending industry for usurious terms and conditions that allegedly mire poor and working-class citizens in a “debt trap.” Buying that logic, the state of Georgia permanently closed all payday lending in 2004, and North Carolina followed in 2005. (Virginia is still debating the issue.)
Morgan and Strain ask the question: Are poor/working class people better off as a result? The answer: No. In both states, the economists documented that the number of bounced checks, complaints against debt collectors and personal bankruptcies increased in Georgia and North Carolina relative to other states.
The main beneficiaries of the ban, it turns out, are conventional banks. Write Morgan and Strain: “On average, the Federal Reserve check processing center in Atlanta returned 1.2 million more checks per year after the ban. At $30 per item, depositors paid an extra $36 million per year in bounced check fees after the ban.”
Bacon’s bottom line: Poor people don’t need Do Gooders meddling in their affairs to pursue their own economic self interest. Let the payday lenders stay in business. The only legitimate role of government is to ensure transparency — to make sure borrowers understand the terms and conditions of the loans — and to prevent fraud. Otherwise, government meddling doesn’t help the poor, it hurts them.
(Hat tip: Chris Saxman. Photo credit of Advance America: Andrew Bain.)