"There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers." ~ Richard Feynman
Sympathy for the Predator
October 15, 2007
Two words have exited the lips of every grandstanding politician in recent months, including President Bush, (no, 'strategery' ain't one of them): Predatory Lending. In the eyes of these economically blind charlatans, it is wrong to use the risk inherent in certain individuals as a factor on which to base loan amounts and interest rates. Elected officials at all levels of government have been busy for quite some time passing legislation against such 'predatory lending.' What has caused this 'outrage' and what exactly have these laws accomplished?
In 1995, due to 'complaints' about storage charges (on top of interest charges) levied on loans against automobiles by pawn shops, the Florida legislature passed a law allowing for 'Auto Title Loans.' These are renewable 30 day loans with an interest rate cap comparable to that of pawn shops (22% monthly). Immediately auto-title-loan companies started sprouting up throughout the Florida landscape, and borrowers, attracted by the no-hassle process, began flocking to them. Under the new statute, the lender kept only the title, allowing the borrower to keep using his car.
By 1997 competition amongst auto title lenders was fierce, with some lenders charging as little as three percent per month (of the 22% allowed by law). Customers were shopping for the lenders who would lend the most against their vehicle at the lowest rate. It wasn't long before some 'complaints' surfaced in the local media. Local politicians (sensing easy prey) began clamoring for more regulations, since these auto title lenders were not contributors to their campaigns, and their clientele for the most part skipped the polls on Election Day. It didn't help that the more organized Payday Loan Industry, equipped with an army of lobbyists and tons of campaign contribution cash, stood to gain most from the ill fate that awaited the auto title lenders.
By late 1998, most counties in Florida had capped the rate on all auto title loans between 1.5% and 2.5%, basically putting every auto title loan company out of business, costing thousands their jobs, and drying up a source for quick loans for a large segment of the population. Less than four years after passing the Auto Title Loan legislation, the Florida legislature had reversed itself, putting the final coffin nail in the industry.
During this period I met and spoke with many County Commissioners and State Representatives on the issue (I owned an Auto Title loan business). The responses varied between absolute idiocy and vehemence, due to their convoluted or very basic understanding of basic economics. In reality the Commissioners were driven more by editorials in the local press, campaign cash from lobbyist representing competing industries, and something every (professional) politician knows a lot about: political expediency. To put it bluntly, once the local TV news started airing a story about a grandmother (who hadn't made a payment in over three months) having her car repossessed, the newspapers' editorial boards across the state started referring to lenders as predators and loan sharks, and lobbyists started arriving with envelopes busting with checks, it was all over for the Auto Title Loan industry. Individual rights and choice always take a back seat to campaign contributions and grandstanding in unfettered democracies.
Today, with foreclosure rates rising and some sub-prime mortgage lenders folding, the howls for more regulation of the mortgage industry can be heard from many editorial boards and attention-hungry politicians. Rarely do any of them dare speak about the choices both the borrower and the lender had made. Ultimately it is the lender's responsibility to assess his risk and price his money accordingly. As well, the borrower must realistically assess his financial situation and ability to repay, at the same time apprising himself of all his options. Government regulations only serve to limit choices for consumers, and while choosing from many alternatives can seem like a daunting task for some, it's always much better than being limited to the one-(or few)-size-fits-all politically expedient solutions that government forces upon markets and consumers.
But what about the politicians? Currently the residents of the State of Florida find it increasingly difficult to make their monthly mortgage payments, and almost impossible to move (since you can't transfer your tax cap from Save Our Homes to the new home) due to skyrocketing property taxes.
Why are taxes so high in the Sunshine State ?
In 2001 the state budget was $47 billion. If you adjust that for inflation ( CPI ) and population growth, the current budget should be $60 billion. Instead, the 2007 Florida state budget is a whopping $72 billion. That's a full 20 percent ($12 billion) above the adjusted 2001 budget (itself no shining example of niggardliness). Local governments in Florida have also been crying poverty, in an attempt to justify their bilking of taxpayers. In Miami Dade County , the 2001 budget was $5.1 billion. Adjusting for population and inflation would make the 2007 budget $6.1 billion. The recently approved 2007 budget totaled $7.5 billion, an astronomical 22 percent above the adjusted 2001 budget, which was itself laden with waste, corruption and malfeasance.
Unlike mortgage or auto loan customers, taxpayers have no choice; they either pay the taxes or lose their property or worse, go to jail. Don't like the way your local school board runs its schools? Too bad. You can always pay to send your kids to private school, but you must continue to pay the school board portion of your property taxes. Are you fed up with waste and malfeasance in your city or county government? Get used to it. If you fail to pay the property taxes, sooner than you'd like you'll be homeless. Go ahead and withhold the portion of your income tax used to fund the war or the Department of Education, I'm sure the IRS wouldn't mind. When it comes to government--as opposed to 'predatory lenders'--you have no options.
The American Heritage Dictionary defines a predator as 'One that victimizes, plunders, or destroys, especially for one's own gain.' Do so-called predatory lenders fit this description? How can they truly victimize and plunder in a free and open market? If they attempt to, their business will be short-lived due to a lack of customers. But government is a different animal. It has unchecked power, along with a captive and enslaved clientele, it has no competition, and if any crops up, it makes sure to use all of the power at its disposal to obliterate it. Who is the actual predator?
So remember to thank the next 'predatory lender' you see. Not only does he make money available for individuals with questionable credit backgrounds, but by doing so he keeps interest rates down for folks who have a 'bad habit' of paying their bills on time. The next time you hear some silver-tongued politician starting to harp on the evils of predatory anything, tell him to shut up and go stare in the mirror (preferably not in a public restroom).