By David Tulis
A plan before Chattanooga city council to restrict payday lenders touches at consequences of quick-cash loans but overlooks a cause — namely the abuse of employers’ holding back.
The proposal restricts all sorts of quick-cash lenders by corralling them into “alternative financial services” category and seeing them “permitted as special exceptions” by city council.
Members Carol Berz and Russell Gilbert want a freeze on the marketplace by preventing clustering of like outfits in the future as they serve a large group of Chattanooga area customers who rely on quick loans to make ends meet before payday.
The pair tell city council that pawnbrokers and check cashers bring neighborhood deterioration, prey on the poor, are “hurting us economically,” and charge outrageous fees and interest rates. Mr. Gilbert says payday loans put poor people on a debt treadmill. Interest rates in Tennessee are capped at 15 percent per year, but lenders charge fees giving an effective higher rate.
The alternative financial services industry serves people who have bad or no credit. To account for high risks and cover losses, paydays charge more than banks and credit unions patronized by wealthier people.
Existing capital, not hot money
Elected officials are indignant that customers of quick-cash shops pay more effective interest rates than higher-quality people who patronize banks. But in serving these borrowers, companies such as Advance Financial do not participate in inflationary loan creation. Banks, credit unions and savings and loans operate on a fractional reserve and has effectively a license to steal. That is to say, a license to create circulating money ex nihilo, from nothing, in the extension of loans. Banks are inflationary, paydays are not. Banks participate the the debasing of the currency and the loss of buying power that injures the great and the small. Payday lenders lend not hot money, but existing money.
Cullen Earnest of Advance Financial says the payday company uses banks and borrows for operating needs. But it does not create “new money” and inflation when it extends a loan. Paydays, then, do not profit from the fraud upon the public as practiced by banks that debase the paper dollar.
Serving need caused by evil custom
Paydays also serve a need created by employers who do not pay wages and salaries at the end of the workday. A few pay weekly. Many pay semimonthly. Some hold workers’ wages a month.
—David Tulis hosts Nooganomics.com 1 to 3 p.m. weekdays on Hot News Talk Radio 1240 910 an 1190 AM, a show that covers local economy and free markets in Chattanooga and beyond. Married and the father of four children, is is a deacon at Brainerd Hills Presbyterian Church in Chattanooga.