BuckeyeBlog

The debate about payday lending has been notable for the anti-lending forces as well as those in the press (am I being redundant?) fail to grasp basic facts about the payday loan industry. I have documented that repeatedly on this blog. It seems that I have more work to do, however, based on today’s editorial in the Dayton Daily News. Let me just comment on a few of the more egregious departures from reality the editors make:

There are alternatives to payday lenders. Credit unions, for instance, and even some banks will make short-term loans for much more reasonable rates.

Really? Then why do people choose payday lenders who, in the view of these editors, rip them off? Are these consumers idiots? Well, no, since the notion that credit unions or banks are going to be making high-risk, unsecured loans at low rates to a large number of people is ridiculous. It isn’t happening now and it won’t happen when the ban goes into effect. The fact is that these high rates are necessary to provide the product that borrowers want and need.

After Sept. 1, short-term loans simply would be capped at 28 percent on an annualized basis, versus the 391 percent that can be charged now. Borrowers would pay $18 for a two-week $300 loan, not $45.

No. A 28% APR on a two-week, $300 loan is $3.23. Would you loan money to someone for that low of a rate? Would you make a profit if you did?

But when lawmakers looked into the payday businesses’ practices, they found that many customers were being encouraged to take out loan after loan because high fees were trapping them in debt.

That sounds like lawmakers actually did a study of the issue and discovered the borrowing patterns of those who take these loans. That didn’t happen. They heard from a handful of people who needed a payday loan at the time but, in retrospect, didn’t like the price they paid. But these borrowers agreed to pay the price at that time, indicating that the viewed it then as a fair price. Furthermore, there was no evidence that people were being encouraged to take out more than one loan. The plural of anecdote isn’t data. (more…)

I have never understood those who decry gridlock. I’ve always thought that if the two parties are fighting in Congress or the General Assembly it means they aren’t passing laws to take our money or restrict our freedom. As the latest example of bipartisanship in Columbus shows, when Democrats and Republicans team up, it’s usually going to mean that you end up with less money in your pocket or less freedom to make your own choices.

Democratic Governor Ted Strickland and Republican legislative leaders John Husted and Bill Harris are joining up to fight efforts to overturn the ban on payday lending. Of course, they claim that it’s not a ban, it’s just a “reform.” Yeah, just like Washington, D.C., didn’t ban handguns — it just made them impossible for people to own. If you enact a law that makes it unprofitable for a business to make a profit, it’s a ban, pure and simple. To deny that the payday lending law is a ban is to either be completely ignorant of the law or a liar.

Considering their statements on payday lending, I’ll give Strickland, Harris, and Husted some credit and conclude that they are merely ignorant. Those who have supported this ban have consistently shown they have no idea about how payday lending works, who uses payday loans, how to calculate a simple percentage rate, or anything about the basics of the lending market.

(more…)

Ohio state representative Chris Widener was featured on CBS’s “Eye to Eye” segment discussing Ohio’s ban on payday lending. As we saw during the debate on this issue, state legislators like Widener just don’t understand the economics behind payday lending. For instance, he repeatedly refers to some sort of “cycle of debt” seemingy caused by payday lending. I have no doubt that Rep. Widener believes that payday lending causes such a cycle of debt. However, outside of the flawed research by the advocacy group the Center for Responsible Lending, you’ll have a hard time finding any academic who studies this issue agree that payday lending causes this.

As testimony from Dr. Tom Lehman pointed out, those “studies” which show that payday lending causes a debt trap are so full of methodological errors that they are worthless. Unbiased research clearly shows that payday loans do not cause economic problems; instead, people who are already having economic problems turn to them. Eliminating these loans will do nothing to stop the “cycle of debt” that Rep. Widener discusses. In fact, as Dr. Lehman’s testimony illustrates, it is likely to cause even more problem for these folks as they turn to even less attractive alternatives.

Unfortunately, Ohio legislators like Rep. Widener ignored the hard data and instead relied on anecdotes and ideologically-driven “research” upon which to base their votes. And it really seems they believe these falsehoods about payday lending and payday borrowers. The banning of payday lending was a shameful expample of legislators failing to do their job. It’s sad that Rep. Widener feels so proud of this abdication of duty that he goes on TV to brag about it.

The Warren Tribune Chronicle had a great editorial today that should be read by all policyamakers. Its title? Ohio Needs to Cut Burdensome Regulations:

Columbus native and Northwestern University economic prof Lynne Keisling in her excellent Knowledge Problem blog dishes up the meow mix to WSJ’s Rebecca Smith for a badly misinformed analysis of the impact freer electric energy markets are having in Texas.

Perhaps Ohio’s recent decision to extend government regulation of electric utility energy will protect corporation bottom lines and manufacturing jobs in the short run. Eventually, however, the distorted or completely missing signals of true prices for consumption and true returns for production investments will cause Ohioans to lose out on jobs and prosperity to places with freer markets such as Texas.

BTW, Texas added 139,000 jobs so far in 2008. Ohio has added a paltry 6,000 jobs.

Ohio native Drew Carey has a great new video discussing the advance of the nanny state and the loss of our liberties, courtesy of the Reason Foundation:

The Blade is unhappy that there are “those who just don’t care about the long-held concept of fiduciary responsibility in the business sector .”

Yikes. It’s a bit hard to tell what the Blade is after there, but it’s a good guess that what they’re really referring to is, you know, decency, which is a bit different than fiduciary duty.

Somebody made a ton of money, had friends, etc. Was it outrageous? No doubt. But the issue is, if there really was a breach of fiduciary duty, then the failure is as much or more in the courts as anywhere else, so take the complaint to the courts if that’s the problem.

If there wasn’t a breach of fiduciary duty, then the complaint should land with the relevant shareholders, as in, what the dickens is the matter with you people, paying this bozo that much?

But neither of those paths will be followed. Instead, someday there will simply be more regulation. Until it stops moving, then there will be subsidy.

I’m not sure how I missed this, but there was an amazing editorial at the Cleveland Plain Dealer on June 23 regarding payday lending that is so rich in irony that I have to comment, even it it’s over a week late.

The opening sentence reads: “Here’s a stunner: Payday lenders resorted to falsehoods in their desperate attempt to continue gouging Ohioans with 391 percent interest rates.” As I’ve documented a few times on this blog, the anti-lending forces (among whom the Plain Dealer’s editors took a leading role) were the ones who were giving completely inaccurate information about payday lending throughout the legislative quest to ban it. The idea that these lenders charged 391% interest rates, for instance, is completely false. They charged $15 per $100 borrowed — that’s an interest rate of 15%. Yes, their annual percentage rate (APR) may have approached 391%, but an APR is different from an interest rate. A note to the Plain Dealer editors — if you are going to slam a group for “resorting to falsehoods” then you might want to refrain from, you know, resorting to a falsehood in the same sentence.

Of course, that kind of sloppy editorializing is par for the course in this debate. The Plain Dealer has also said in the past that lenders make “grotesque profits,” which is a blatant falsehood. I say “blatant” because reading any academic literature about payday lending shows that this claim (and many others made about payday lenders by the anti-lending forces) has no basis in fact. I find it highly ironic that the Plain Dealer editors blast payday lenders for “falsehoods” when they themselves are among the leading purveyors of falsehoods during this debate.

A lot of Congressmen, Senators, and pundits are blaming oil speculators for the rise in energy prices. I’ve already noted on this blog Bob Murphy’s excellent piece explaining the role of speculators and why attacking them illustrates a fundamental ignorance of economic markets. Now Fortune has an interesting piece showing what happens in the real world when you ban speculation. Back in the 1950s onion farmers were able to convince Congress to ban speculation for their commodity. The results?

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

If politicians have their way and oil speculation is curtailed or banned, you will likely see something similar in the oil market.

Hat tip to the Cato Institute’s excellent blog.

Over at Reason Online there is a great article debunking the latest fad in advancing the nanny state — mandatory nutritional labeling in restaurants:

Americans may say they would also like to see dietary information on menus. But providing it costs money, in a fiercely competitive industry. If patrons really wanted such disclosures, no law would be needed. Restaurants, eager to attract customers, would already be providing the numbers—just as they strive to offer other things that bring in business. …

The belief that more facts will generate wiser decisions is appealing but, at least in the realm of food, yet to be proved. No one seems to have noticed that as nutritional labeling has expanded, so have American waistlines. The federal government first required packaged foods to carry such information in the mid-1970s, and today, we are collectively fatter than we were then.

What does that suggest? Either people don’t notice what’s in the food they buy, or they don’t let the knowledge affect what goes in their mouths. …

There is little research to suggest that calorie alerts will make any difference in obesity rates. In 2004, the American Journal of Preventive Medicine reported that when women of normal weight were given this kind of information, it had no effect on what they ate, and that facts furnished in restaurants were also irrelevant in dining decisions.

A study in the Journal of the American Dietetic Association found that people who dine out frequently are less likely to pay attention to nutritional data than people who eat mostly at home. It suggested that “those who have a less nutritious diet are less likely to use food labels and have less interest in doing so.”