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Jewish World Review May 15, 2001 / 22 Iyar 5761

Philip Terzian

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Consumer Reports

Show me the money -- AMERICANS like to talk about thrift -- "He that goes a borrowing goes a sorrowing" (Benjamin Franklin) -- but we practice profligacy, and we've never quite sorted things out in principle. We are believers in a sound economy and a strong dollar, and we profess to abhor an unbalanced budget. But we are considerably happier when the government is spending rather than getting, and we are prodigous consumers of credit as well. Personal debt in the United States is substantially greater than in any Western country.

Of course, as Alexander Hamilton taught us 200 years ago, debt is not such a bad thing, really: The extension of credit has enabled the American economy to grow and build wealth, at historic rates, and faster than we borrow cash to finance our endeavors. Indeed, we are so forgiving on the subject of debt that, when Congress tightened our notoriously generous personal bankruptcy laws earlier this year, there were widespread complaints about the heavy hand of government, and suspicions that when the banking industry speaks, the Bush administration invariably listens.

No doubt, there are historic precedents for these attitudes. Suspicion of financial institutions is part of our national heritage: The early New Englanders were patently hostile to borrowing and spending; Midwestern farmers were forever at war with the banks. And some of those presumptions have filtered down to the present day. Like most Americans, I get more than a few letters in the mail -- and, to my annoyance, telephone calls at home -- informing me that I have been "pre-approved" for this or that new credit card. My invariable response is that I already have more credit than I need.

But no doubt, some of those who open their mail or pick up the receiver are tempted by the prospect, and impressive lines of credit. As any bankruptcy judge will tell you, easy credit is a little like alcohol: Most of us consume it in prudent fashion, but a few do not, and they pay a nasty price.

Experience has shown, however, that the vast majority of American debtors are responsible borrowers: They read the fine print, they understand interest rates, they spend carefully, and well within safely affordable boundaries. They pay their bills on time, they avoid penalties, and they never allow the margin of debt to exceed their ability to settle accounts.

But tell that, if you can, to the guardians of household accounting in Congress, or the self-appointed tribunes of consumers in the marketplace. A case in point is a relatively new phenomenon in banking: Payday advance credit, which enables customers to acquire, for a fee, a small amount of cash for a short period of time against their next paycheck.

This is an industry which emerged, in the 1990s, to serve the void created when traditional lenders of very small, short-term consumer loans withdrew from the market. According to a recent study by the Credit Research Center at Georgetown University, payday advance customers "are primarily moderate-income consumers who are often in early stages of the family life cycle. They are more like to use consumer credit and tend to have higher levels of consumer debt relative to income than the population as a whole .... [They] typically have high rates of return on investments in household goods [and] because of the high return on household investment, they have strong demand for credit."

They are, in fact, young, middle-income, relatively well-educated customers who may need quick cash for purchases or to control their monthly finances. They understand the terms of the service, which usually involves higher-than-average interest rates, and they avail themselves of payday advance credit on a very limited basis. They regard it as a useful service, they comprehend the risks involved, they take responsibility for their personal finances, and their default rates are astonishingly low.

Still, this has not prevented members of Congress -- notably Sen. Paul Wellstone, D-Minn., and Rep. John LaFalce, D-N.Y. -- from seeking to throttle the industry through overregulation, or an outright ban, repeating the populist presumption that banks, in these instances, prey on the poor and elderly. They do not. This is not the banking equivalent of state lotteries, or off-track betting, or fly-by-night investment schemes. Neither the poor nor the elderly are consumers of payday advance credit, and the industry is compliant with federal banking standards and state regulations.

This is, in fact, a classic instance of politicians and special interests, such as the Consumer Federation of America, seeking to limit the financial choices and resources of citizens because the special interests and politicians think they know what's best for them.

Everyone agrees that personal debt is a serious matter, that credit may be open to abuse -- and, yes, that banks can be too eager to recruit too many customers. But every financial practice is open to abuse, and payday advance credit has been shown to work well. People are the best judge of their household needs, and government works best when it monitors commerce while avoiding telling citizens how to run their lives.

JWR contributor Philip Terzian is associate editor of The Providence Journal. Comment by clicking here.


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© 2001, The Providence Journal