From the Economist: In Praise of Usury

[Guy Berger]

It seems like some of the restrictions on payday lenders hurt the very people they intend to protect...

Economics focus

In praise of usury

Aug 2nd 2007

From The Economist print edition

Ignore credit snobs. It is no sin to profit from lending to the poor

JAC

IN DANTE'S “Divine Comedy”, usurers are consigned to a flaming desert of sand within the seventh circle of hell. Attitudes have since softened a bit. Microcreditors, who offer small loans to self-employed poor people, enjoy hallowed reputations. One has even ascended to the rank of a Nobel laureate. But lending to the poor is still considered distasteful whenever it is pricey, short-term and profitable. In America, for example, many activists are quick to damn “payday” lenders, who may charge high fees for offering cash advances on a worker's next pay cheque.

Why this hostility? To profit from lending to the poor, critics say, is to prey on the most vulnerable, at their most vulnerable moment. Faced with desperate customers, loan sharks can charge well over the odds, even when the risk of default is slight. The money they proffer is often squandered on spurious consumption, critics say, rather than productive investments that would help the borrower repay his debts. Easy credit thus tempts people into a damaging spiral of indebtedness.

That may be enough for Dante. But economists take a bit more convincing. If loans hurt the poor, why do they take them? Surely they are capable of looking after their own interests. Alex Tabarrok, an influential economics blogger, thinks the anti-usury lobby are “credit snobs”, who think that credit is something only the rich can handle.

Some critics of usury appeal to psychology not snobbery, however. The “behavioural” economists have shown that people's decisions often conflict with the plans they had laid for themselves. When planning for the future, people are willing to defer gratification, forgoing smaller, earlier rewards in favour of bigger, later ones. But when choosing in the present, they give up huge future benefits for immediate gratification. If they anticipate their own weakness, people may quite rationally chop up their credit cards, or tie money up in illiquid assets. It is the financial equivalent of avoiding restaurants with irresistible desserts.

Some governments have concluded that by denying expensive credit to the poor, they would be doing them a favour. In America, many states have crimped payday lending by imposing anti-usury laws or restrictions on lending terms. In Japan, interest-rate caps have, in effect, wiped out much of the formal consumer-lending industry.

In poorer countries, governments are ambivalent. On the one hand, they are anxious to subsidise microfinance, extending small-business loans further than the market allows. But they take the opposite attitude towards consumer credit, imposing interest-rate caps that stop lenders reaching as many people as they otherwise might. South Africa this year tightened curbs on reckless lending and overborrowing.

Widening the circle

Is the South African government right to think that credit has gone too far? Rather than relying on theology or theory to answer this question, a recent working paper offers some rare evidence. Dean Karlan, a Yale economist who is co-director of the Financial Access Initiative, and Jonathan Zinman, of Dartmouth College, studied a profit-seeking lender that served some of South Africa's poorer neighbourhoods. Suspecting that its credit standards were too strict, the lender was willing to experiment with a looser provision of credit. It asked its loan officers in Cape Town, Port Elizabeth and Durban to reconsider 325 out of 787 applicants who had narrowly missed out on approval for a loan. The lucky 325 were chosen at random—nothing distinguished them from the remaining 462, except the luck of the draw. This allowed the researchers to establish a causal link between the loan and changes in the lives of the applicants.

Most of the new customers took a four-month loan at an annual interest rate of about 200%: a 1,000-rand loan, for example, would be repaid in four monthly instalments of 367.50 rand. For the bank, the study proved the wisdom of stretching its lending limits. The new clients were profitable, if not as profitable as the borrowers already on their books. The authors reckon the bank made a gain of at least 201 rand per loan.

Did these profits come at the expense of the poor? On the contrary. Despite the demanding terms on offer, those reconsidered for a loan seemed to prosper. Six to twelve months later, they were less likely to go hungry, and their chances of being in poverty fell by 19%. Not coincidentally, they were also more likely to have kept their jobs, perhaps because the credit helped them to overcome emergencies that might otherwise have forced them to abandon their posts. About a fifth of them, for example, spent their loan on transport, such as buying or repairing a car that they might have needed to get to work.

The results were not all as happy: the authors found some evidence of higher stress, especially among female borrowers. But people also reported more control over their lives and a more positive outlook. Perhaps the easier access to credit allowed them to take a longer-term perspective, even if “longer term” is measured in months or weeks rather than the more conventional notion of decades.

Contrary to the fears of the credit snobs, the readier access to credit did not tempt the new customers into a debt trap. Over 15-27 months, those reconsidered for a loan were more likely to have a formal credit score. And this score suffered no harm as a result of their easier borrowing.

Overall, the study suggests that profit-seeking lenders do not deserve the fate Dante reserved for them. Far from tempting the poor into unpayable debt, they help them keep their jobs, put food on the table, and build up a credit history. The authors show that poor people can make good use of borrowed money, even if they sometimes struggle to demonstrate this creditworthiness to lenders. If not hell, that is a kind of purgatory.

[Guy Berger]

Karlan and Zinman had an editorial in Thursday's Wall Street Journal. I think their arguments are fundamentally sound, though this sort of tone may not go over well outside of the ivory tower...

edit: actually, after the first paragraph I thought the tone was quite reasonable.

(disclosure: I TA'd for Karlan when I was a grad student)

In Defense of Usury

By DEAN KARLAN and JONATHAN ZINMAN

November 1, 2007; Page A18

Charge 80% per year on a loan in the U.S. and you're called a usurer. Charge 80% per year on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

Which is the right label? Outrage over usury is based on a fundamental belief that credit at high rates does borrowers more harm than good. This belief now holds sway among policy makers world-wide, who seek to curb consumer lending at "excessive" interest rates. Prescriptions include the interest-rate caps imposed recently by state and federal governments in the U.S., Japan and South Africa. Several U.S. states are considering additional measures, including outright bans on payday lending.

But the result of interest-rate caps is often less access to credit. Advocates for restricting access correctly note that poorer consumers (and for that matter just about everybody else) have decision-making limitations that are exploited in the market. Examples include impulsive spending, and underestimating the cost of borrowing and the benefits of long-run investing.

But even consumers making flawed decisions may be better off when they can borrow from regulated financial institutions at "excessive" rates.

Our organization, Innovations for Poverty Action, tested this proposition. We worked with a successful finance company in South Africa to randomly choose some just-below-the-normal-approval-bar applicants to receive a four-month installment loan. The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy.

We then tracked both groups over the next six to 27 months, measuring their well-being based on a range of economic, social, health and mental health measures. Applicants who were randomly approved for a loan had higher incomes, less hunger, better credit scores and more positive outlooks than their control group counterparts -- even after paying the high interest rate. Though they had higher than normal default rates, the borderline loans were also profitable for the lender.

The new borrowers did report higher stress and depression levels than the control group. But overall, the borderline loans objectively did more good than harm. Our findings are striking because governments that restrict credit access do so on the premise that consumers make themselves worse off by borrowing at high rates.

How can it be that consumers get preyed upon in the market, yet still end up better off? One possibility is that returns to borrowing swamp the cost of consumer mistakes. Rolling over payday loans repeatedly might cost you big bucks; but it can turn out to be a good deal if you need the initial loan to fix your car, hold on to your job and avoid losing even bigger bucks in after-tax earnings.

Another possibility: The alternative to being gouged by a financial institution is being gouged more expensively by an unregulated lender.

So what should policy makers, advocates, and practitioners do? Don't restrict access or competition. Do equip consumers with the financial survival skills they need to succeed in the marketplace. How can we do right by consumers in financial markets? Social science offers two key lessons so far.

First, product features and product presentation affect consumer decision-making. We know this from both developed and developing countries. There is no "neutral" way to present financial choices to consumers; products and their presentations should be designed to guide folks to the choices that suit them best. Better loan-disclosure laws, for example, might help make sure borrowers are fully aware of the terms of their commitments. Opt-out (instead of opt-in) payroll savings plans could help employees accumulate savings.

Second, we owe it to consumers to consider the evidence, and demand more of it, before swinging the pendulum away from access to credit. This means more scientific evaluations, using gold-standard randomized methodologies such as the one described above.

Firms can and already do integrate testing into their day-to-day operations. But much remains to be learned about how to make finance work best for lower-income and poor people. What mixture of products and services maximizes impact, and also delivers institutional growth and sustainability? Which marketing and presentation of products deepen outreach, and help target those who will benefit the most? It is both good business and good policy to have concrete, reliable answers to such questions.

Mr. Karlan is assistant professor of economics at Yale University and president of Innovations for Poverty Action. Mr. Zinman is assistant professor of economics at Dartmouth College.

Edited November 3, 2007 by Guy

[JSngry]

Well I'll be darned!

[porcy62]

This is very interesting, though I didn't understand almost nothing, but...since you, Guy, are an expert (no joking, no mocking) can you explain me why all this mess for subprime mutual funds, if it's profitable to lend money to poors?

[Chuck Nessa]

We would all do so much better without the poor.

[Chuck Nessa]

We would all do so much better without the poor.

On the other hand, so many seem to be making money off these poor folk.... Maybe that is sustaining the economy.

Time to read the old communist books again.

[Big Wheel]

I think this is outside the scope of this article, but let's not forget one reason we consider these "payday lenders" predatory that has nothing to do with the interest rates they charge on loans: the fact that a substantial part of their business comes from check cashing services. That's right, people actually pay these places to cash their paycheck if they don't have a bank account, which usually costs $0 to open.

[JSngry]

Ya' load 16 tons, and what do ya' get?

The Man giveth, and The Man findeth a way to taketh it right backeth.

Why don't we cut the pretense (pretense is so 20the Century, doncha' know), and bring back the company store. Who needs money when you can just use script?

[Dan Gould]

I'd like to see this study replicated in the US before we absolve payday loan places from being the scum-sucking turds that they are with what I guess is somewhere around 90% of their customers. Because I will bet that well over 50 out of every 100 payday loan customers are not better off after falling into their clutches. Unfortunately, there is no way to replicate this study because no one ever gets turned down, so there can't be a "control group" to compare outcomes. If you've got a payroll check, you get a cash advance - at unconscionable interest rates/fees.

Really the bottom line is that these companies could cut their rates significantly, still make money, and continue to provide what is a valuable service to working poor/low credit folks. But the proof that they gouge their customers lie in their advertising: no one ever says that their costs are lowest - they only say how EASY it is to get cash.

I'm not sure who the bigger scum bag industry is - payday loans, or the rent-to-own people. At least at the end of a rent-to-loan deal, you do own that sectional sofa (only you've paid $4000 for a $800 couch).

And Jim, pretense isn't so twentieth century - layaway is.

[JSngry]

I'm not sure who the bigger scum bag industry is - payday loans, or the rent-to-own people. At least at the end of a rent-to-loan deal, you do own that sectional sofa (only you've paid $4000 for a $800 couch).

And Jim, pretense isn't so twentieth century - layaway is.

And early on in the plan, if youy're a day or two or ten late on a payment, no prob.

But towards the end, if you're 5 seconds late, UH OH, here come the repo.

[Guy Berger]

This is very interesting, though I didn't understand almost nothing, but...since you, Guy, are an expert (no joking, no mocking) can you explain me why all this mess for subprime mutual funds, if it's profitable to lend money to poors?

Porcy... this would require an epic explanation, but to keep it short: subprime doesn't refer to mutual funds, but rather to a class of borrowers who are not prime (whether due to low incomes, poor credit history, etc). In the US, mortgage lending to these kinds of borrowers took off in the past few years; due to a combination of poor understanding of the actual terms of the loans, dishonesty by lenders and dishonesty by borrowers, much higher numbers of these borrowers are defaulting on their mortgages in the past. This is leading to turmoil in financial markets because bonds linked to these mortgages are turning out to be much riskier than previously believed.

Guy

[Jazzmoose]

I have to agree with Dan here. I'd like to see a study of the process in this country.

[Guy Berger]

I think this is outside the scope of this article, but let's not forget one reason we consider these "payday lenders" predatory that has nothing to do with the interest rates they charge on loans: the fact that a substantial part of their business comes from check cashing services. That's right, people actually pay these places to cash their paycheck if they don't have a bank account, which usually costs $0 to open.

BW, Something in your story doesn't quite wash. If checking accounts at banks really are a perfect alternative to check cashing services... why are people still using check cashing services? I'm guessing it's a combination of poor access to local banking services, perhaps distrusts and/or unawareness of local banking services...

For what it's worth, AFAIK I cannot access the full cash amount of a deposited check after depositing it, but only a fraction. For somebody who needs cash NOW that could be a significant constraint.

The poor (in the US and elsewhere) are "underbanked". Reducing access to payday lending isn't going to solve this problem.

[Guy Berger]

I'd like to see this study replicated in the US before we absolve payday loan places from being the scum-sucking turds that they are with what I guess is somewhere around 90% of their customers. Because I will bet that well over 50 out of every 100 payday loan customers are not better off after falling into their clutches.

I think your argument is missing an element -- usually by the time somebody is forced to go to a payday lender they're already in pretty bad shape.

Really the bottom line is that these companies could cut their rates significantly, still make money, and continue to provide what is a valuable service to working poor/low credit folks. But the proof that they gouge their customers lie in their advertising: no one ever says that their costs are lowest - they only say how EASY it is to get cash.

Honestly, I don't know the economics of the industry well enough to judge. Are payday lenders much more profitable than mainstream lenders? Maybe, maybe not. If this is an incredibly profitable sector, why aren't mainstream lenders entering it?

The reason that these guys advertise the ease of getting cash is because that's exactly the most important thing for their customers.

By the way, I completely agree with Dan that it would be interesting and worthwhile to see a study of this industry in the US.

Guy

Edited November 4, 2007 by Guy

[catesta]

I think this is outside the scope of this article, but let's not forget one reason we consider these "payday lenders" predatory that has nothing to do with the interest rates they charge on loans: the fact that a substantial part of their business comes from check cashing services. That's right, people actually pay these places to cash their paycheck if they don't have a bank account, which usually costs $0 to open.

BW, Something in your story doesn't quite wash. If checking accounts at banks really are a perfect alternative to check cashing services... why are people still using check cashing services? I'm guessing it's a combination of poor access to local banking services, perhaps distrusts and/or unawareness of local banking services...

For what it's worth, AFAIK I cannot access the full cash amount of a deposited check after depositing it, but only a fraction. For somebody who needs cash NOW that could be a significant constraint.

The poor (in the US and elsewhere) are "underbanked". Reducing access to payday lending isn't going to solve this problem.

I think you will find a lot of people using check cashing services are those that have previously burned a bank or two and are unable to open another account, people that like to carry their life in their pockets and illegal immigrants.

A solid alternative to check cashing services for some is pay cards. The check amount is loaded on a debit/ATM card and the employee is given a PIN. They can withdraw the cash all at once or in part. There is one no fee transaction per pay cycle and they can either use the ATM or go directly to the bank teller.

[porcy62]

This is very interesting, though I didn't understand almost nothing, but...since you, Guy, are an expert (no joking, no mocking) can you explain me why all this mess for subprime mutual funds, if it's profitable to lend money to poors?

Porcy... this would require an epic explanation, but to keep it short: subprime doesn't refer to mutual funds, but rather to a class of borrowers who are not prime (whether due to low incomes, poor credit history, etc). In the US, mortgage lending to these kinds of borrowers took off in the past few years; due to a combination of poor understanding of the actual terms of the loans, dishonesty by lenders and dishonesty by borrowers, much higher numbers of these borrowers are defaulting on their mortgages in the past. This is leading to turmoil in financial markets because bonds linked to these mortgages are turning out to be much riskier than previously believed.

Guy

Thanks, I knew it, more or less, but if traditional credit is based on judgment on solvibility of the borrowers, prime if I understood correctly, lending to subprime and sell the risk to others through bonds is a good deal, as far the lenders minimize their risk sharing it with unaware people who bought the bonds. I mean that one thing is talking about lending small amount of money to poor people in poor countries that is for what AMARTYA SEN got the Nobel, another thing is Usury in developped country. I mean that there is something wrong if people in a developed country is pushed to borrow money for buying stuff, like cars or bigger houses or HDTV, some economists says that more the consume rise better for the economy, maybe, but I still find a lot of difference in lending money to a poor farmer for buying some cows in Zimbabwe. Anyway I admit I am not an economist.

[Alexander]

Credit is a form of volunteer slavery. I'm favor of shitcanning the whole thing and starting over at zero.

Edited November 4, 2007 by Alexander

[Dan Gould]

Credit is a form of volunteer slavery. I'm favor of shitcanning the whole thing and starting over at zero.

You're just pissed because it has permanently postponed that "inevitable" Marxist revolution.

[porcy62]

Credit is a form of volunteer slavery. I'm favor of shitcanning the whole thing and starting over at zero.

You're just pissed because it has permanently postponed that "inevitable" Marxist revolution.

On the contrary, it has promoted the bankrupcy of the middle class, the solid rock that stood against the revolution until now, and his transformation in a mass of poors that we Bolsheviks may lead. So in the long run U.S. will be a communist country and China the champion of free enterprise. Obviously global resources will end well before, we'll be extinguished, but Marx was right

[JSngry]

What bugs me about this is, as predicted, the "tone", that "payday lenders" are really just good businessmen providing an honorable service to a market despearately in need of same since there are not other alternatives, real or potential, so let's ditch the stigma and...encourage these guys, why don't we?

Yeah yeah yeah, how many time are we gonna get fooled by this type of rhetoric before we recognize that a turd poilished is still a turd, and even if we all gotta shit, there's no need to put the toilet in the kitchen? The reality is simple - this is a market that largely has no options, and those serving it look to profit from that absolutely as much as the market will bear. "Desperate" customer base meets opportunisitc service provider. LEgal as hell, maybe even "moral" in the very broadest sense, but let's leave it right there and not start getting misty-eyed about how it's capitalist humanitarianism in action or some other type bullshit.

I remember when it was the hippies/etc who were dissed for "sugarcoating" reality. That was a legit criticism too. Now it's the moneybaggers doing the sugarcoating, and we're supposed to take them seriously why? Becuase they mean well? Because they understand shit we don't? Because they hold the keys to The Wonderful World Tomorrow?

I don't think so.

Oink oink.

[Big Wheel]

I think this is outside the scope of this article, but let's not forget one reason we consider these "payday lenders" predatory that has nothing to do with the interest rates they charge on loans: the fact that a substantial part of their business comes from check cashing services. That's right, people actually pay these places to cash their paycheck if they don't have a bank account, which usually costs $0 to open.

BW, Something in your story doesn't quite wash. If checking accounts at banks really are a perfect alternative to check cashing services... why are people still using check cashing services? I'm guessing it's a combination of poor access to local banking services, perhaps distrusts and/or unawareness of local banking services...

For what it's worth, AFAIK I cannot access the full cash amount of a deposited check after depositing it, but only a fraction. For somebody who needs cash NOW that could be a significant constraint.

The poor (in the US and elsewhere) are "underbanked". Reducing access to payday lending isn't going to solve this problem.

The poor access thing is unlikely to be a factor in urban areas. For example, here's a rough map I made of San Francisco's Tenderloin, with banks (or at least ATMs) marked in green and check cashing joints in blue. (Note: I can't vouch for Google Maps being 100% accurate and up-to-date with its business listings.) While check cashing stores are way more prevalent in the heart of the neighborhood, no bank is much more than a quarter mile away, I'd guess.

Banks versus check cashing

[Guy Berger]

This is very interesting, though I didn't understand almost nothing, but...since you, Guy, are an expert (no joking, no mocking) can you explain me why all this mess for subprime mutual funds, if it's profitable to lend money to poors?

Porcy... this would require an epic explanation, but to keep it short: subprime doesn't refer to mutual funds, but rather to a class of borrowers who are not prime (whether due to low incomes, poor credit history, etc). In the US, mortgage lending to these kinds of borrowers took off in the past few years; due to a combination of poor understanding of the actual terms of the loans, dishonesty by lenders and dishonesty by borrowers, much higher numbers of these borrowers are defaulting on their mortgages in the past. This is leading to turmoil in financial markets because bonds linked to these mortgages are turning out to be much riskier than previously believed.

Guy

Thanks, I knew it, more or less, but if traditional credit is based on judgment on solvibility of the borrowers, prime if I understood correctly, lending to subprime and sell the risk to others through bonds is a good deal, as far the lenders minimize their risk sharing it with unaware people who bought the bonds.

Well, when lending to riskier borrowers the lender makes up for the greater riskiness of the loan by charging a higher rate of interest. You are 100% that securitization reduces this link by (A) pooling and diversifying the risk from individual loans and (B) by shifting risk to people who are more willing to bear it. My understanding is that, in fact, more Americans did gain access to credit as a result. I don't know how much of it this is due to chicanery (lenders and/or borrowers lying about the quality of the underlying loans).

Guy

[porcy62]

This is very interesting, though I didn't understand almost nothing, but...since you, Guy, are an expert (no joking, no mocking) can you explain me why all this mess for subprime mutual funds, if it's profitable to lend money to poors?

Porcy... this would require an epic explanation, but to keep it short: subprime doesn't refer to mutual funds, but rather to a class of borrowers who are not prime (whether due to low incomes, poor credit history, etc). In the US, mortgage lending to these kinds of borrowers took off in the past few years; due to a combination of poor understanding of the actual terms of the loans, dishonesty by lenders and dishonesty by borrowers, much higher numbers of these borrowers are defaulting on their mortgages in the past. This is leading to turmoil in financial markets because bonds linked to these mortgages are turning out to be much riskier than previously believed.

Guy

Thanks, I knew it, more or less, but if traditional credit is based on judgment on solvibility of the borrowers, prime if I understood correctly, lending to subprime and sell the risk to others through bonds is a good deal, as far the lenders minimize their risk sharing it with unaware people who bought the bonds.

Well, when lending to riskier borrowers the lender makes up for the greater riskiness of the loan by charging a higher rate of interest. You are 100% that securitization reduces this link by (A) pooling and diversifying the risk from individual loans and (B) by shifting risk to people who are more willing to bear it. My understanding is that, in fact, more Americans did gain access to credit as a result. I don't know how much of it this is due to chicanery (lenders and/or borrowers lying about the quality of the underlying loans).

Guy

My understanding is that, as far as you have a real social welfare, access to credit should be target at enterprises, nor at consume. From my point of view, it doesn't make sense to lend money for a bigger house, based on the low interests and on the real estate bubble. I mean that a safe credit system should lend money to people who need them to produce. A naive example: if I were a fisherman I'd borrow money for a bigger boat, in order to increase my business, not for a new car. If you buy a bigger boat all the economic system could gain from it: I'd probably need another sailor on the boat, ecc.. Lending money for the basic thing of surving shouldn't be a problem, because the government, through taxes should provide the minimal standard of living for every citizens: healt care, public school, housing.

Well, this is a long and difficult issue. As long as the financial market will go in this way, and credit is a major part of it. Actually financial market is credit: stocks are credit, bonds are credit, mutual funds are credit to companies, governments...doesn't matter. This is not the place, nor I am enough expert of it.

Thanks for your patience.

[Alexander]

My understanding is that, as far as you have a real social welfare, access to credit should be target at enterprises, nor at consume. From my point of view, it doesn't make sense to lend money for a bigger house, based on the low interests and on the real estate bubble. I mean that a safe credit system should lend money to people who need them to produce. A naive example: if I were a fisherman I'd borrow money for a bigger boat, in order to increase my business, not for a new car. If you buy a bigger boat all the economic system could gain from it: I'd probably need another sailor on the boat, ecc.. Lending money for the basic thing of surving shouldn't be a problem, because the government, through taxes should provide the minimal standard of living for every citizens: healt care, public school, housing.

The problem is that we're no longer a world full of shop-keepers, but rather one of employees. Yes, a bigger boat (for a fisherman) leads to increased production, which leads to increased profits, which leads to a better standard of living (a bigger house, a better car...all without recourse to consumer credit). But most of us work for somebody else, and as such we have no way of increasing our profits and making more money (apart from looking for a better paying job).

The system of consumer credit is one that keeps people on a treadmill, making money in order to pay the bills which are never really paid off because we keep buying on credit. Part of it is a matter of personal character: If we all developed the ability to be happy with what we have and control our need for immediate gratification, we'd be a lot better off. But the consumer credit crisis isn't about shopaholics who are spending the rent money on the Home Shopping Network or eBay. It's about ordinary people whose cost of living has outstripped their earning power. People are maxing out their credit cards paying the rent and buying groceries. In addition, energy costs, health care costs, and education costs are so high that most of us are finding ourselves priced out of the so-called "American Dream." It's a sick system when people are graduating from college deeply in debt. Add to this a new set of bankruptsy laws designed to protect lenders instead of consumers...it's a house of cards, and it's about to tumble to the ground.

It's been a long time since I last read "The Wealth of Nations." What, if anything, does Adam Smith have to say about credit?

[porcy62]

My understanding is that, as far as you have a real social welfare, access to credit should be target at enterprises, nor at consume. From my point of view, it doesn't make sense to lend money for a bigger house, based on the low interests and on the real estate bubble. I mean that a safe credit system should lend money to people who need them to produce. A naive example: if I were a fisherman I'd borrow money for a bigger boat, in order to increase my business, not for a new car. If you buy a bigger boat all the economic system could gain from it: I'd probably need another sailor on the boat, ecc.. Lending money for the basic thing of surving shouldn't be a problem, because the government, through taxes should provide the minimal standard of living for every citizens: healt care, public school, housing.

The problem is that we're no longer a world full of shop-keepers, but rather one of employees. Yes, a bigger boat (for a fisherman) leads to increased production, which leads to increased profits, which leads to a better standard of living (a bigger house, a better car...all without recourse to consumer credit). But most of us work for somebody else, and as such we have no way of increasing our profits and making more money (apart from looking for a better paying job).

The system of consumer credit is one that keeps people on a treadmill, making money in order to pay the bills which are never really paid off because we keep buying on credit. Part of it is a matter of personal character: If we all developed the ability to be happy with what we have and control our need for immediate gratification, we'd be a lot better off. But the consumer credit crisis isn't about shopaholics who are spending the rent money on the Home Shopping Network or eBay. It's about ordinary people whose cost of living has outstripped their earning power. People are maxing out their credit cards paying the rent and buying groceries. In addition, energy costs, health care costs, and education costs are so high that most of us are finding ourselves priced out of the so-called "American Dream." It's a sick system when people are graduating from college deeply in debt. Add to this a new set of bankruptsy laws designed to protect lenders instead of consumers...it's a house of cards, and it's about to tumble to the ground.

It's been a long time since I last read "The Wealth of Nations." What, if anything, does Adam Smith have to say about credit?

I understand that the Big Issue is a social welfare. Even in Italy people are living on credit aka debt. My father was a man who never had a debt in his life. He did only what he could afford. I understand that the Big Guns of Financial market, and even the toyguns, are able to manage huge debt and credit and money makes money, but for common people is not easy. So the fact that you can rely on social welfare is a good thing. Over here everybody's complaining about taxes, but nobody asked for a private health care system, they are asking for more efficient public health system. Same with education.

I believe that the real sickness of the system is that it has to overproduce, overconsume, overspending, overdebt...over, over. The GM will close unless every american will buy a new car every two years, and so on...it's late overseas. Good Night.