The notion that we can somehow improve the lot of low-income borrowers by regulating high-interest credit out of existence is a dangerous illusion.
In a perfect world, no one would need to borrow money to make it to their next
paycheck.
But we do not live in that world. Demand for credit persists. Attempts to suppress it will drive it underground or create informal, less regulated markets, such as loan sharks or unregistered lenders, that expose borrowers to even worse conditions.
Instead of wishing away the credit market for low-income borrowers, policymakers should focus on making it work more efficiently for these consumers.
Rather than obstructing the market, they must ensure that it operates fairly and transparently so that people living paycheck to paycheck – approximately 50% of USA households – can access credit without falling into a cycle of unmanageable debt.
To do otherwise is to deny economic reality.
Whether we like it or not, the market will always find a way to meet demand. The role of policy is to shape the market in a manner that
protects consumers, not to destroy it. We must trust individuals, even those of modest means, to make decisions they believe are in their best interest.
Ultimately, freedom entails responsibility. In a free society, individuals must be allowed to make choices—sometimes difficult ones—based on their own judgment. The role of government is not to
eliminate risk but to ensure that markets function freely and transparently, enabling individuals to navigate those risks with knowledge and autonomy.
As Friedrich Hayek observed, the more the state intervenes in the economy, the more we are deprived of our ability to act freely and the more distorted the
outcomes.
