The difference between Stella Creasy and ourselves

Other than the obvious differences that is, she's an MP, we're not and so on. This tale of Wonga falling into administration being a useful example of that major underlying difference. We'd like to solve problems, Ms Creasy to appear to do so.

Wonga collapsed into administration yesterday as Britain’s biggest payday lender lost its battle to stay afloat after a wave of customer complaints.

It was indeed Stella Creasy who led the charge against the company and payday lending in general. The thing being, the problem isn't solved, not at all. As a part of the Federal Reserve has noted:

Except for the ten to twelve million people who use them every year, just about everybody hates payday loans.

Yes, that's an American number but the UK incidence will be about the same in proportion. As they go on to say:

Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researcherstreat a 36 percent cap as an outright ban. In view of this, “36 percenters” may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether. 

Again, specific numbers will be different but the general underlying point is the same. A price cap will, dependent upon its level, simply abolish the activity altogether. Or at least legal versions of it, Big Tom and his kneebreakers will revive themselves.

The difference? Ms. Creasy and her campaign have exited Wonga from the market. But there has been no replacement for those borrowing desires of all those customers, the problem has not been solved that is. How to provide the desired credit at a price thought reasonable? 

Our preferred solution? Those who think that the price was unreasonable set themselves up to provide short term credit in small amounts and do so at that price they consider moral. This would both drive Wonga and others out of business and also solve the problem, that unavailability of reasonably priced credit. 

It's possible that this won't work. That this form of credit is simply very expensive to provide. We're aware of a US attempt by the largest Thrift Store organisation and they found themselves charging 230% or so APR just to cover costs, no profit involved nor even return to capital.

Even so we disagree with what has been done. For the problem isn't solved - the provision of reasonably priced credit. All that has been banned is those voluntary transactions of credit at a price suppliers and consumers are willing to agree upon. We don't regard this as a victory - but Ms. Creasy and the like will. Which is something of a difference, isn't it?