Sometimes you should not be allowed to do what you want to do

Over at the Torygraph they are fulminating gently about the hidden costs of capping payday loan charges. To most of us the action on Wonga et al seems pretty clear-cut – the cap means that they are limited to a 100% interest rate – ie they can’t charge you more than twice the original loan amount.

This is a Money Shop. It is what a problem looks like, not what a solution looks like

Judging by the number of money shops and assembled crap joints in the High Street, there’s a lot of demand. The apologist for wanting to make a profit out of lending money to people that shouldn’t be borrowing money is this mouthpiece for the Institute of Economic Affairs Steve Davies, on Radio 4

Payday loan companies will no longer be willing to lend to those judged to be at a fairly high risk of defaulting. Previously, these people could arrange a short term loan from legitimate businesses. As has been the experience in other countries, we can now expect more of them to turn to often vicious loan sharks that operate entirely outside the law.

Mark Littlewood of the Institute for Economic Affairs

The Torygraph cited the IEAs Director-General Mark Littlewood for the gem, but it sums up what Steve said on Radio 4. And hell, if you’re the DG then I guess the buck stops there

Now if you look at the IEA’s website you can see that these guys are basically right-wing-nut-jobs. You know the search for John Galt is strong in the hallowed halls of the IEA from the topics. Now there’s nothing wrong in having right-wing nut-jobs, humanity needs a range of views. There’s no doubt a school of thought that considers an Ermine in that category with intemperate snarls like this.

Nevertheless there are some wickets it’s really hard to bat on. Like giving matches to two-year-olds, ‘cos it’s an affront to their yuman rites of freedom to stop them discovering fire. It being A Good Thing that uniquely among European nations ordinary UK citizens will receive their mains powered goods with three exposed wires and will have to source and fit their own mains plugs[ref]this was the situation in Britain before February 1995 when commonsense prevailed in the  face of resistance from manufacturers. There’s a bunch of old fossils reminiscing about the lost art of UK mains plug wiring which tickled the vintage geek in me.[/ref] with a one in three chance of a lethal outcome[ref]there are six ways of wiring a plug, assuming one wire to one pin and nothing left out. If you wire the green and yellow earth wire to the live and it’s a Class I device like a kettle, then if you plug it in and grab hold of the tap and the metal case it will piss you off deeply if you are lucky, and kill you if you aren’t lucky[/ref], and other things like that.

So let’s translate what IEA DG Mark is saying here

We at the IEA think it is a jolly good thing to lend money to people who don’t have any. It’s a decent, honest source of profit and there are a few edge cases where it’s the right answer. Obviously there’s a risk of collateral damage and totally screwing up some punters’ lives, but in the end you gotta ask yourself

What would John Galt[ref]John Galt was the protagonist in Ayn Rand’s Atlas Shrugged, with the motto “I am not my brother’s keeper”[/ref] do?

And then do the right thing by John, natch.

Err, yes. There are about ten good ways of using payday loans and about a hundred wrong ways of using them. Guess which ones most people use, which is why we’re having the discussion. The IEA’s bod was on t’other side to the Bishop of Stepney. The fundamental beef the IEA has is simply summed up on their website

Regulating payday lenders will shrink the supply of credit

Well yes, that’s the ‘king point you wunch of bankers! I am just old enough to remember a time when Britain had credit controls, before Thatcher iced them. That was a terrible time, believe me.  Ordinary people could manage to buy houses, because they weren’t allowed to borrow stupid amounts of money to pay stupid prices for a collection of stones. If you couldn’t afford to buy a TV you bought your consumer shit on hire purchase. You ended up paying a hell of a lot more, but if you couldn’t afford the repayments then all that happened is a bunch of guys with thick necks came into your house and grabbed their telly back without paying you a bean.

Stumbling and Mumbling sums up the results of Thatcher’s easement of credit controls as a successful failure pretty well.

her relaxation of credit controls in the early 80s had a bigger economic impact than she intended. She envisaged these as a step towards economic freedom. But they were more than that. They permitted a consumer-driven society and economy. This was not her intention. […] her vision of Britain was of a property-owning democracy of savers with moral restraint. She got indebted spendthrifts. She wanted the British people to be like her father, but they turned out more like her son.

In short, the IEA need to get the idea that sometimes the puer aeturnus in us all needs some roadblocks to getting his own way. What happened with the expansion of credit was that after three decades the property owning democracy got hard for ordinary grunts because it tempted them to put too much of their lifetime earnings into the purchase cost of a house, aided and abetted by the suppliers of that credit. That trickled down to the poor, who in the past were saved from revolving credit card debt by the fact that they couldn’t get any. I recall the first Access card I got in 1979 as part of the student banking deal at Imperial College with Nat West. It scared the shit out of me because I had the voices of previous generations ringing in my ears

Don’t spend more than you earn, son

and yet to use a credit card at all you have to spend more than you have at the instance of the purchase. It’s the whole point of a credit card – to increase your instantaneous spending capacity.

Wonga is out there bottom-feeding in this market. The IEA is missing the point deliberately when they assert regulating payday lenders will shrink the supply of credit

Shrinking the supply of credit to people who shouldn’t have it because they can’t pay it back is the whole bloody point

Earth to IEA right-wing nut-jobs

The FCA is fighting the fire that was started by the loosening of credit controls – those indebted spendthrifts epitomising Thatcher’s legacy  by spending money they don’t have because they can. The IEA then tried to play the bleeding heart about where will the poor get their utilities from? Well, way back when I had an electricity meter with a slot for 50ps guess what happened when I didn’t have any 50ps?

I lived without electricity until I had the money

People did it for hundreds of years, y’know.You get cold. You get hungry. You go to bed early in the winter. There are better electricity solutions than a Wonga loan. It’s called a prepayment meter. Yes, the cost per unit is higher. But that’s just the way the world works – poor people pay more for a lot of things because of credit control, buying in small lumps and it being increasingly hard to tell the thrifty poor from the spendthrift poor, hence the Sam Vimes Boots model.

Let’s face it, if you can’t afford the ‘leccy bill you aren’t going to get any sustainable electricity supply using Wonga, are you? The kind of situation that Wonga can help with are people who have assets, but can’t  access them for the moment. Those assets can be the value of your future work, or next year’s un-CGT-embargoed share sales . But this is a very small set of Wonga’s client base, because usually when you have enough income to generally cover your spending you are financially literate and don’t get yourself into such financial shit in the first place. Most of Wonga’s customer base are people who are on the wrong side of the Micawber principle. Their spending is too much for their income. The guys need to Spend Less or Do Without. In theory they could Earn More but that’s not working out in this economy, leastways at the bottom end.

Wonga and the guys that the IEA are batting for basically lend money to people who they know can’t pay. They take the risk because they holler loud enough in people’s ears and garnish their credit card accounts such that the non-payment gets shifted to some other unlucky creditor – like the utility supplier or the credit card firm.

The next line the IEA took is that all this will do is push people into the arms of loan sharks 😉 The answer to this is to crack down on loan sharks, seize their assets and if you can’t actually break their legs then at least do a Taylor Swift on their Beemers and Mercs

Now in my view the Bishop of Stepney has an error in his thinking too, but it isn’t dangerous. He believes credit unions are the solution. They aren’t, because unlike banks, credit unions can’t lend money they don’t have. [ref]That in itself is no safeguard – the branch manager of the Ipswich credit union looted £100,000 of savers’ money. Although it’s claimed this didn’t have any effect on the ISCU, I note it is no longer in existence[/ref] So they need to persuade rich people to save with them at low returns to lend to poor people who are bad risks. Rich people don’t get rich by taking on bad risks at low returns. It’s just not how you get or stay rich.

If he wants rich people to give money to poor people he needs to do that through the political arena, and that’s a different question. Shrinking the supply of credit to people who can’t pay it back is a start in plugging the hole. Every time you buy something on credit, you are choosing to buy it at a higher price, because you pay interest, and you are choosing to impoverish your future self.

Thatcher apparently believed people had morals when it comes to money. History has proved her wrong

I had the bad luck to look for a job in the aftermath of Thatcher’s first recession, so I’m probably not a balanced critic, but it appears that Thatcher believed that people had principles, even when it comes to money. Bless. I’m not sure I buy this interpretation, but let’s run with it

Presumably she didn’t foresee her property owning democracy ending in a BTL property owning oligarchy, and giving the market power over lending meaning that lending would be advanced  to NINJAs in times of plenty leaving seven lean years and counting that ruin whole generations. In the end asking for any politician to have a crystal ball that shows true across thirty years is a big ask, and even if she did set a wrong course the ghost of Thatcher past could reasonably challenge the weak hands afterwards of failing to steer the ship of State away from the sandbanks.  There are some people who have principles when it comes to making money, but not enough. Somehow you have to regulate an ever increasingly complex system that is global, not national in scope and staffed by the finest minds money can buy, while your regulators are the civil servants of nation states.

Wonga et al are obviously parasitic enough that regulation isn’t hard, though I’m sure Wonga will find some way round the rules and their customers are desperate enough not to face up to their problems that they’ll comply. But for now the cat is ahead of the mouse. Anything that pisses the IEA off is probably good for the country as a whole.

The trouble is that it isn’t just the poor who are drunk on credit The middle classes are drunk on it and passed out on the kerbside with the bottle in their hands. Those high house prices are still there. One way of regulating credit is increasing interest rates, but there’s no taste for that because of the massive keening noise that would ensue 😉  Now that we’ve cracked down on poor people spending more than they earn with Wonga, it’s time to move on to the overstretched middle classes in their zombie households. Their pay is falling behind inflation. Somebody should step up to the plate and stop them borrowing money to spend more than four times their salary on a house. And demand that they have a convincing answer for the question “how are you going to pay off the capital before you retire“?

No doubt the IEA will come over all John Galt on me and say well, it’s a free market, why shouldn’t these numbskulls borrow loadsamoney to buy a house with? To which the answer is that they jack up the price of commodities like houses until every bugger has to borrow loadsamoney. Even if they don’t want to buy, their rent goes up to service the capital. It’s not a victimless crime.

I’ve accepted most of the fault in overpaying for a house early on, But some of it was because I was competing as a single man with couples desperate to get their MIRAS double tax relief before the door closed on that. We’re not all independent actors on the stage when a shitload of easy credit is dropped from helicopters, precisely because it is a market. Thatcher can perhaps be forgiven for the stupidity of thinking she’d get savers rather than spendthrifts, the experiment hadn’t been tried. But we have thirty years of research that shows give a Brit easy credit and s/he will chuck it into housing which will go up in price to soak up the credit. Where it festers – if they had to spend it on meals out at least restaurateurs would get some of the money and it would enter the economy. As it is the money just goes to make the land and bricks dearer, and no, the answer isn’t a land value tax it’s to stop feeding the Beast  in the first place. Credit isn’t just bad for poor people. It’s bad for homebuyers too.

Sometimes you should not be allowed to do what you want to do. For your own good and that of the people around you. Reining in Wonga is the hors d’oeuvre. It’d be nice if the mortgage market were the main course one day.