Philip Terzian
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
http://www.jewishworldreview.com --
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. 
JWR contributor Philip Terzian is associate editor of The Providence Journal.
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