Every crisis brings its opportunities. Its paradoxical, but not surprising, that the creditcrisis has provided an opportunity for the alternative credit industry. Not many new businesses are opening in the nations high streets. But payday loan companies have never had it so good. The payday loan sector is now worth £1.7bn, having expanded five-fold in recent years. This week, brash and breezy payday loan company Wonga announced that it was moving into small business loans. This is yet another sick symptom of the continuing bind that the economy is in.
Its appalling enough that such companies were allowed to operate pretty much as they pleased during theboom, when credit was cheap and plentiful. Back then, its fair to say, there was a prevailing, if delinquent, view that those who delivered themselves into the clutches of alternative usurers hadonly themselves to blame. Now, in recession, thats a harsh argument to make. These alternative loan businesses have expanded in direct response to the economic crisis. Anyone can see that this new post-crash penury is intimately connected to woeful general circumstances, not personal moral failings.
Now, surely, is a good time for society to realise the basic and repugnant folly of making access to cash significantly more expensive for those who need it most desperately. Wonga is careful to emphasise that its small business loanswill be short-term, aimed at companies with cash-flow problems, rather than companies seeking capital investment. Wonga will provide, it says, a service that is supplementary to banking services.
Can there be a more damning indictment of the banking sectors failure to do its job than this? What kindof bank supports a viable business so inadequately, at such a difficult time, that the business is compelled to go to adifferent lender, to take out and pay offthe same loans over the same cycles, butat a higher cost? A bad bank.
Wonga has been shy so far about informing the public of its interest rates. But it doesnt take a financial genius to work out that they will be higher than bank rates. That, after all, is the nature of the beast. Payday loan companies relyon the high rates paid by those who dont default to supplement those who do. They can therefore afford not to be choosy. For them, its win-win. Their overheads are low because they ask few questions and make few checks. But with the banks being so cautious in their own lending, Wonga can be sure lots of their customers will pay up and cover the costs of those who dont. Thats right. Good businesses will be triply disadvantaged at this time when they need to be nurtured. They will pay extrafor the cash they need to keep things ticking over, and that cash will supplement their less disciplined competition, and consign some oftheirown profit to this growing vulture sector. Lovely. The deserving businesses will finance the growth of the undeserving businesses.
Talk of the deserving poor and the undeserving poor underpins much debate about which individuals should be afforded societys protection. Yet, allthis serves further to obscure a basic fact about money and economics that isconstantly referred to, but rarely explicitly acknowledged. Capitalism isnt just a way of generating wealth. Itsa system that distributes reward andpunishment in the form of access togoods and services via money. Thats why people find it so stingingly unfair that some people are rewarded just by the circumstances of their birth while others are punished by them. Money is areward for success; some humans are given generous acknowledgement of their massive success from their very first breath.
Suck it up. That wont change. But theresponsibility of advantage can andshould be understood and managedbetter.
The biggest flaw in capitalism is thatits usually the people with the money who decide who deserves to be rewarded. That was what the bankers bonuses rows were really all about, and the MPs expenses rows. People who have never experienced life without enough money are, of course, likely tohave little idea of howhard it is to achieve success from nothing. But, again, that doesnt matter quite as muchas people think it does. This flaw in capitalism is quite easily rectified.
If economists would only see that growing inequality is prima facie evidence that rewards are being stockpiled by the prize-givers, instead ofdistributed deeply and widely enough to maintain the consensual andstable society that capitalism needs in order for it to function smoothly, then wed save ourselves much grief.
It was perfectly obvious during the boom that the economy was not working well, precisely because inequality was rising. Likewise, free-marketers will always argue that welfare state activity is hampering capitalism. Again, welfare state activity is a booming klaxon, declaring loudly that capitalism is failingadequately to make room for Adam Smiths invisible hand to make itsgeneral gesture of support with sufficient flourish. I was glad this week to read a piece by German economist Tillvan Treeck, which reported: Renewed interest among economists ininequality as a macroeconomic risk ishighly encouraging.
Its time for capitalists to understand that they failed to regulate themselves, and that unless they come up with a credible plan for self-regulation, there will be consequences. The banks are stillarguing that regulation will stifle them. Instead, lack of regulation continues to stifle other businesses – allother businesses except those more venal than the banks themselves.
The government is always banging onabout helping small businesses. Heres an idea. Give small businesses thepower to sue banks that refuse to give them loans that prove viable. The banks should then be obliged to make good any extra cash that went the way of the alternative providers. After all, they have been asked nicely to start lending to small businesses for a number of years now. Wongas move into this market simply shows that, despite the protestations of the banks, they are not providing a service that they exist to provide.
Of course, that still leaves personal borrowers at the mercy of loan companies. The Labour MP for Walthamstow, Stella Creasy, has been campaigning for two years for a cap to be put on the cost of credit.
Unbelievably, the government agrees that the proposed Financial Conduct Authority (FCA) should be allowed to cap the cost of credit – in theory – but refuses to give it explicit power to do so. This means that any attempts to curb interest rates by the FCA would be subject to expensive and possibly fruitless legal challenge.
In other words, even after such a seismic financial crash, ministers have no real interest in paying more than lip-service to the idea that risky and exploitative lending should be discouraged. Payday loan companies areone of the few sectors with growth. Curbing their activities would have adetrimental effect on Britains economic figures. A debt bubble is being replaced with a smaller, but even more aggressively unforgiving debt bubble.
Smart.
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