In Defense of Payday Lending (by ReasonTV)

Payday lending is one example of subprime lending. The idea is that if you are lending to the poor, you must charge higher rates to compensate for the risk of default. This can also be interpreted as exploiting the poor. This is a very serious ongoing debate in another example of subprime lending, in microfinance. Free market ideology dictates that in order to make a subprime lending operation “sustainable”, it must make a return on investment that is approximately equal to the market rate (the rate that is made from prime lending). By contrast, some poverty relief organizations like the Grameen Bank (this organization spearheaded microfinance under the direction of Muhammad Yunas in Bangladesh) use government and donor subsidized loans to charge a far lower rate of interest on their loans, as well as a variety of financial services to help the poor actually improve their lives with fantastic results. It is my opinion that one of the primary roles of government is to perform economically inefficient services so that people who cannot normally afford such services can have access to them. I feel that subprime lending is a perfect example. In the video, the interviewee in favor of market-oriented subprime lending implies that the choice for the poor is between loans at ridiculously high rates of interest or no loans at all. Of course this is a false dichotomy, if we weren’t so quick to vilify the government, it would be apparent that subsidized loans offer a great middle ground.