Well intended Chancellor, George Osborne, is apparently firm in his belief that he knows better than poor and vulnerable adults who seek to access credit from pay-day loans companies and has announced plans to set maximum allowable prices for credit. The result is that the most vulnerable sections of the population will be banned from accessing legal sources of credit. The condescending premise of the ban is that vulnerable adults are unable to properly judge when an obviously risky deal remains the better option for them in the circumstances, and that these adults are simultaneously predated upon by big name brands in a competitive market. This is insulting to both parties.
The Consumer Finance Association – a trade body – responded:
If the objective of the proposed cap is to drive out rogue lenders the Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem.
The Chancelleor should recognise that when a popular product is made illegal, people will continue to want it and will turn to criminals to get it. Credit is not even as risky drugs, and is a far more constructive decision that many more people will contemplate. Drugs have been prohibited for many years and are still bought and sold in the street.
The effect of drug prohibition has been to increase risks and cause more violence between the gangs that trade in the prohibited industry. Keeping credit costs as low as possible is likely to be easier if the Government ensures that the credit market is thriving, and capping profits is not going to help in that regard. Incumbent credit operators, like Wonga, are likely to retain their lead position thanks to their established and trusted brand names. New entrants already face large marketing costs to establish themselves as trusted companies. Capping their profits means they will have less interest in overcoming the reputation barrier and entering the market, meaning Wonga will be protected from competition.
If Osborne wants to punish Wonga, he is going in the wrong direction.
Libertarian Home 
Yes the loan sharks (the leg breakers) will be overjoyed at this announcement.
But one should not be too hard on Mr O. – remember this is his first job.
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Well, what do you expect from people who don’t understand the free market and thus that the market sets a price for borrowing money? These are people who think “the interest rate” is a matter for central planners remember.
The funny thing is, I was able to explain time preference to my sister- who has little knowledge or interest of economics- because of this, and she understood it, simply by using the example (we were in Sainsburys) of purchasing goods for future usage in bulk (i.e. special offers of 48 bog rolls or whatever). So it is doubly baffling that our lords and masters with degrees in PPE don’t seem to understand it. It’s almost as if they don’t care about economic facts. That can’t be it, surely?
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Ian you know that PPE does not teach decent economics, it teaches false economics (for example that lending does not need equal REAL savings – that credit expansion, to reduce interest rates, is a good policy). It is perfectly possible for someone to through PPE and still have a good grasp of economics – but (alas) this means in spite of what they are taught, not because of what they are taught.
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