A guest post by NZ Labour MP Chris Chauvel on the No Right Turn blog brings up the issue of loan sharks, and in particular, whether the Government should legislate them out of existence. Chauvel is of the opinion that they should be and has a members' bill in the ballot to do just that. He says:Loan sharks prey on the vulnerable with unscrupulous rates of interest and this includes many of our Pacific people. They are the scourge of our community and instead of lending a helping hand keep borrowers in poverty.
And:
Market forces are clearly not an appropriate determinant of interest rates at this low end of the socio-economic spectrum. It's all very well to guarantee bank deposits and slowly roll out a nine-day fortnight. But this is something that would help those in real financial trouble. I call on the Government to do the right thing and take action in this area now.Some of Chauvel's proposals have merit, in particular allowing loan sharks to charge fees, although I don't know why they should need to be registered to do this. However, I think the bill is a bad idea.
Why do these people take out loans at all, if the rates are so high? This sentence of Chauvel's is revealing:
Increasing numbers of people are pawning items like bikes and children's toys just to meet essential expenses like their power bill. I saw an elderly man taking his weed eater into a loan shark outfit in Wellington, and it was distressing to watch first hand.It is certainly tragic for someone to have to sell their bikes to pay for their power bill. But why are they doing this? It is because they don't have enough money to pay their power bill at all, and they consider it a good trade to sell these things. Chauvel proposes no remedy for this situation (also known as relative poverty), so it seems he would prefer people sit in unpowered houses full of bikes and toys. I suspect the people in question may disagree.
In this vein, I would argue against the implicit assumption that taking out these loans is always irrational. Chauvel engages in a little evocative rhetoric with "loan sharks prey on the vulnerable" and gives some dubious examples but doesn't really argue for this at all. It's the classic prohibitionist fallacy - to assume that anything with high costs is necessarily irrational. But this isn't a useful approach. I think these loans can often be rationally entered into; if you are starving and need money for food, and you aren't getting paid for a while, it is quite plausibly rational that you might sacrifice some pay in the future so that you can eat now. Perhaps the stigma among your bogan friends of not owning a car is bad enough that you would be willing to pay extra to own it right now.
These sorts of situations are hard for our highly-paid politicians and moderately paid pundits to understand, no matter where they sit on the political spectrum. I think it is easy once you are in power and engaged in high-level discussions and important decisions, it is easy to run together an admirable concern for the poorest members of our society with an unfortunate paternalism with regards to their intelligence and ability to make decisions. If you think that poor people are inherently stupid, this sort of legislation intrinsically looks more useful. If you do not, then it looks highly patronising.
Even if you don't agree with what I've just said, you should of course still worry about the black market. As Chauvel observes, loan sharks already engage in activities of dubious legality, so it is not much of a step for them to move to the all-out illegal trading. Legislation will not stop high-risk borrowers needing short-term credit, nor, without quite substantial levels of surveillance of transactions, even stop loan sharks from operating. I predict that if this law passes, we will still see loans being given out to poor people, but with the loan sharks resorting much more quickly to violence and intimidation. Then we will see actual loan sharks, and it will not be good news for the poorer citizens of New Zealand.
Two somewhat unrelated asides:
Firstly, it is interesting that with respect to the credit crisis, we criticise lenders for underpricing the risk of loans. But here, we slam them for correctly pricing risk!
Secondly, does anyone know why they are called sharks? I suppose if they stop lending they die, much like sharks can't stop swimming. But if you generalise it, that applies to any job. Is it because sharks hunt and eat smaller fish? Surely then a more accurate metaphor would be 'loan humans'. Hm...