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article imageOp-Ed: Payday loans — A lesson for the banks?

By Alexander Baron     Jul 11, 2013 in Business
Recently, a government watchdog ordererd a clampdown on payday loan companies that batten off people's misery. Will our rulers learn the lesson and apply it to the banks?
This is a problem that has been in the news for some time. Last month, the consumer watchdog Which? called for tighter regulation of these companies. The Competition Commission has recently committed to what it calls a comprehensive investigation. One that may take up to two years to complete!
The major payday loan companies have themselves already met with the Government; they were summoned.
It is easy to portray these companies as parasites but in the first place, they lend to people who cannot get credit elsewhere, so it stands to reason they will charge higher - at times significantly higher - rates of interest. Also, unlike banks, they lend real money rather than create credit out of thin air and sell it at interest.
Compare the following.
A payday loan company advances a relatively small sum, say £200 to a borrower and is not repaid anything. Let's say the borrower already has massive debts, and goes bankrupt. That money is lost by the company forever, and there might be further losses if it attempts to recover the loan through the courts. Even a totally disreputable lender - one that uses illegal collection methods - will end up out of pocket.
Now consider what happens when a bank lends the same amount of money. It creates a new account and credits it with £200; the borrower withdraws this money - usually by cheque - and when this money is spent and finds its way into another bank account, it increases the money supply. As the loan is repaid, this new money is cancelled out of existence. Any interest on the loan returns to the bank becoming part of its profits - and the net increase in the money supply. But what happens if this loan is not repaid in whole or in part? All that happens is the bank closes the loan account, and at some point in the future quietly writes off the loan. Skeptical? Here is a short video that shows the scale of this sort of write-down. Congressman Alan Grayson chases the government official charged with investigating money that has been created out of thin air by the Federal Reserve only to vanish without trace in similar fashion. And she is unable to give him any meaningful answer.
If Congressman Grayson was left exasperated by this blithering, other politicians have had some success at a local level, including in San Francisco. Now if only the British Government and other governments worldwide would adopt a similar no-nonsense attitude to the banks.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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