Access to capital

Payday lenders provide a necessary service, the argument goes.

Poor and working-class people need access to capital, and without the payday loansharks they would be shut out completely. People like me and George Bailey, therefore, who want to overturn Marquette and reinstate meaningful usury laws, would only end up hurting the poor by eliminating their only resource for credit.

That's the argument in favor of payday lenders, and I hope I've expressed it fairly.

But it is wrong. Wrong on the facts and wrong on the economics.

Payday lenders are not the only resource providing access to capital for poor and working-class people. They are simply the most capitalized and the most visible such resource.

Savings & Loans were deregulated in the 1980s, creating a boom and bust as many of these institutions fled their original mission and purpose. Freed to offer ever-higher interest to depositors, many S&Ls began to chase the big bucks. These new depositors could not be lured with the modest profits from affordable mortgages that were the traditional bread and butter of S&Ls. So to attract these deposits — millions of dollars divided into taxpayer-insured chunks of $100,000 — the booming S&Ls began lending to ever-larger and riskier projects. When these projects ultimately failed, taxpayers wound up footing the bill — spending billions to bail out the very depositors who had helped to destroy these vital institutions.

But not all S&Ls took the bait. Many refused to chase after the new deposits that could be gotten by offering higher rates. They stayed with the traditional model that had made S&Ls a modest, unflashy but reliable pillar of America's economy. (That model has been described as "3, 6, 9, 3 and 9" — you pay depositors 3 percent and collect 6 percent for loans, you work from 9 a.m. until 3 p.m., and you play nine holes of golf before dinner.)

Those institutions are still there, still providing access to capital for working- and middle-class Americans. So are the credit unions and the growing network of community development financial institutions.

These institutions provide credit for poor and working-class Americans at rates that are far more affordable — more than a hundred times so — than the rates charged by payday lenders.

Why then aren't these institutions doing a better job competing with the predatory shadow banks springing up to exploit this same clientele? Shouldn't their much lower rates give them the competitive edge?

The answer is that the real competition is on the other side — the competition for depositors, for the capital that enables these institutions to provide credit for their customers.

The competition for depositors is not a level playing field, and it hasn't been since 1978, when the Supreme Court's ruling in Marquette v. First Omaha Service Corp. essentially overturned America's state-by-state usury laws.

Reinstating those usury laws would level the playing field. It would reinvigorate the local financial institutions that provided access to credit for the majority of Americans during most of our nation's history.

Congress has the power to do this. Marquette could be rendered irrelevant legislatively by creating a federal usury law.

The effect on payday lenders — and on the virtual offshore banking centers in Sioux Falls and Wilmington — would be a shake up similar to that which hit the S&Ls following deregulation. Some would adjust. Others would not — they will be neither missed nor mourned. The millions of dollars that our large, "respectable" banks have invested in payday lenders would be reinvested and redirected, with some of it flowing back into the S&Ls and credit unions and the rest flowing into other productive sectors of the economy.

The end result would be more access to affordable credit for poor and working-class Americans.