I hate the payday loan industry. So you might be tempted to think I would think I have something in common with the Obama Administration that is working overtime to demonize this industry. But you would be wrong. Recently, the Heritage Foundation blog explained what is wrong with the government’s criticism. The government, it turns out is trying to become a payday lender.
Naturally, payday lenders’ competitors don’t argue that these loans shouldn’t be made at all. Instead, they want to make the loans and use taxpayer funds to help them do it. To help speed the transition to a fully government-funded financial industry, the Obama administration instituted Operation Chokepoint, a program which aggressively investigates banks and payment processors that deal with payday lenders. These actions amount to an abuse of power, and Rep. Darrell Issa (R-CA) is investigating the matter.
But if the government offers lower interest loans at taxpayer expense, what will be the result? Essentially, it is making it artificially more attractive to go deeper into debt! That is not a solution to anything. But that is exactly what our Federal government is doing.
Section 1205 of Dodd-Frank included a provision that turned a local San Francisco program (Bank On USA) into a national program by making Community Development Financial Institutions (CDFIs) eligible to compete with payday lenders. This competition will come at the expense of taxpayers because CDFIs receive nearly $300 million in taxpayer subsidies each year, all in the name of promoting economic growth in low-income areas.
The one good thing about payday lenders is that they eventually cause enough pain to teach some of their customers to stop using them, learn financial discipline, and develop an emergency fund. And if the payday lender ends up with too many customers who fail to pay him back, then the worse that happens is that another payday loan shop goes out of business. The rest of us aren’t involved.
But what “ObamaLoans” is doing is reminiscent of the Clinton insanity of forcing banks to give mortgages to people who couldn’t afford them. It may not blow up the same way, depending on a lot of other factors, but it doesn’t help the poor. To be honest, if the government wants to help the poor by some positive taxpayer-funded action it should simply give them help, perhaps with conditions to encourage them to improve themselves.
The predatory lender state is worse than the traditional welfare state.