Bailout

Does predatory lending rise when other credit contracts?

By Felix Salmon

Megan McArdle writes that access to credit is good for the poor:

Damon Runyon didn’t just make up the crowded living conditions, the loan sharks, the reliance on pawnbrokers. Those are relics of that golden bygone era when bankers didn’t extend credit to people without solid incomes, substantial assets, or affluent relations. Fewer people got themselves into trouble with a bank, it is true. But there are a lot of worse ways to get into trouble. And as with the War on Drugs, I’m pretty strongly averse to more paternalistic policies which improve the lives of the middle class while making poorer people worse off.

Megan won’t be surprised to learn that I too am averse to policies which make poorer people worse off. But I’m not at all convinced that tightening rules on credit has that effect. Indeed, it seems to me that payday lenders and the like positively thrived during the credit boom — much as India’s moneylenders have thrived and grown even as microfinance institutions in the country have done likewise.

So is there less predatory lending now, from loan sharks and payday lenders and the like, than there was in Damon Runyon’s day? I’d love to see some numbers on that — as opposed to anecdotes from an author who specialized in chronicling the criminal underclass.

Full post as published by Macroprudential on January 06, 2010 (boomark / email).