New Orleans The problem with purely “academic” arguments is that the academics and their rationalizing and prevaricating “sponsors” forget that there are real people and real policies impacted by their foolishness. Certainly this is the example of an editorial page piece in the Wall Street Journal recently entitled “In Defense of Usury.”
Two assistant economics professors, Dean Karlan and Jonathan Zinman, at name brand colleges (Yale and Dartmouth), who are desperate to make a name for themselves no matter what the cost to others, published this piece. The heart of their argument was that “…the result of interest-rate caps is often less access to credit.” Their proposition is that “…consumers may be better off when they can borrow from regulated financial institutions at ‘excessive’ rates.” From the very beginning you can already see the fishtailing of our young profs in the surgical insertion of the qualifiers: “often less” in the first instance and “may be better off” in the second. They don’t want to have to live or die on the sharp edges of their ridiculous argument. They want to be able to run back to base and remind the more realistic that this was just speculation, an academic argument, and they had qualified it after all…this was a piece for discussion, rather than a definitive statement that might reroute their careers.
Their evidence for questioning the policy arguments around usury limitations and movements, like ACORN’s in the US and Canada, to impose pay day lending and other predatory lending restrictions, is based on a study they did for “a successful finance company in South Africa” whose business model was grossly exploitative with a “normal rate: 200% APR.” Ouch! Their “company” called “Innovations for Poverty Action,” which must have been some kind of duplicitous and sick fraternity joke meant to provoke a snicker I presume whenever they say it, for some reason did a study for this finance company. In a ridiculously short 4-month period (probably all the time our guys had off from school?) they tested the impact of two groups of borrowers: one approved for these usurious rates just below the normal credit standards of this finance outfit, and the other those rejected for the loans.
In this quick period they assert that the group that got the loans at predatory interest has “higher incomes, less hunger, better credit scores and more positive outlooks” than the people rejected for the loan. This is a peculiar mix of objective and subjective tests, that already makes me suspicious of the data, frankly, over a period of time that hardly proves anything realistically. They concede that there were higher default rates among these borrowers, but claim that hardly matters since the finance company still made money by charging usurious rates. Gawd! They acknowledge that the “new borrowers did report higher stress and depression levels than the control group” but they poo-poo this by simply asserting that “…overall, the borderline loans objectively did more good than harm.” Then they race on to make a series of outlandish conclusions about governmental regulations totally unsupported by this slender data.
I wonder why they did not conclude for the South African finance outfit that their standards for approving or rejecting loans were arbitrary and insubstantial. Certainly the real lesson seems to be that once the business model of the company is to fleece the customers at 200% APR, such predatory rates can cover a host of sins by the company and still have them coming up roses. That after all is the business model for a lot of shylock lenders, pawn shops, and others.
Additionally, our professors attempt to prove their paradigm based on the survivors of these financial tragedies and equally slender rationalizations about whether or not frequently renewed pay day loans might have allowed someone to fix a car and therefore keep a job or other “lightning strikes” kinds of examples, rather than looking at the entire cycle of loans to debts to assets to income and where it might stop.
They try to cover themselves at the end of this argument by saying something shallow about better loan disclosures, which the ACORN Financial Justice Center has continually found is a Band-Aid on a hemorrhage. The whole nature of a predatory loan is based not on the loan itself but the predatory situation the borrower has been forced to accept because of their personal calculation of survival and need. That is why in desperation they had to accept the loan at such ridiculous terms. They had no choice. What help are disclosures in abetting desperation? They also try to argue for more testing like what they are doing to find out the real impacts of restricting credit, but god save us from more of their kind of “tests.”
There is something obvious that we are overlooking here in the arguments about predatory lending on one hand and even micro-credit on the other: increasing debt is not going to alleviate poverty! To impact on poverty we have to increase assets and then keep predators from reducing those assets so that families have an opportunity to not simply survive but thrive. We need to get right on this, and not look for more ways to excuse robbery simply because it has someone’s consent, as in these cases.
My vote is to give these guys tenure so that they can stay in these colleges. The last thing I want is for them to try to find more work enslaving poor families around the world!