The Free Market 18, no. 5 (May 2000)
The Pulitzer Prize has been known for honoring great works and great folly. A newspaper colleague of mine in 1977 won a Pulitzer for a very moving (if, albeit, a bit staged) photograph of a legless Vietnam veteran sitting in a wheelchair in the rain watching an Armed Forces Day Parade in Chattanooga, Tennessee. The Pulitzer also is still recovering from the Janet Cooke fiasco of 1981 when the prize committee had to rescind the award given to the Washington Post reporter who wrote a fake story about a nonexistent eight-year-old heroin addict, the story called “Jimmy’s World.”
While the reputation of the award has been up and down, at least one constant theme of the Pulitzer Prize, however, has been anticapitalism. Each year, one can count on at least one set of articles, editorials, or features that denounce the free-enterprise system or “expose” the evils of corporations. At the same time, government regulators who attempt to “rein in” those capitalist thugs receive universal praise. (In fact, a standard Pulitzer Prize-winning story will involve the reporter “exposing” those regulators who do not use all of their powers to expand the state’s boundaries as far as the journalists believe they should go.)
The 2000 prizes were no exception, as the committee awarded the Pulitzer for editorial writing to John C. Bersia of the Orlando Sentinel for a series of articles that denounced lending practices in Florida. Bersia’s subject was how the numerous “legal loan sharking” firms lend money to poor people or those folks who have bad credit, and how their “evil practices” must be declared illegal.
Most heavily attacked in the six-part series were the title-loan and check-cashing companies. These title-loan firms generally operate by making small consumer loans, holding one’s car title as collateral. For example, a person may borrow a small sum, say $100, and pay $115 back within a few weeks.
As long as the loan is paid back on time, there is no trouble. However, should the borrower chronically fail to make timely payments, the company can seize his or her car. Check-cashing operations appeal to someone who is short of cash a week or two before payday. Someone who needs, say, $200 today but won’t have the money for a couple of weeks, will write a check to the loan company for something like $215 or $220 which the company will cash when the person is paid. As long as the check clears on the appointed date, the borrower is paid in full. However, should the check bounce, the borrower must pay back at even higher interest rates.
It is obvious that such loans carry very high rates of interest, and that is what troubles these reformers the most, especially the prize-winning journalist from Orlando. For most of us who have conventional credit cards or engage in spending habits that do not run our balances to zero a week before payday, title-loan and check-cashing firms generally are not on our radar screens. But those who choose to go that route, according to the editorial writer, are simply victims of avaricious businessmen.
Bersia tells the story of someone who borrowed $100, did not have enough to pay back the amount in full, and two years later is now thousands of dollars in debt. What he is asking us to believe, of course, is that the small amount of money to be repaid, perhaps $25, suddenly morphs into thousands of dollars.
The story might be compelling if true, but that is not the case. What actually happened was that this particular person continued to borrow money, and if one borrows money at high rates of interest, it is not long before the interest payments turn into their own private monster. And while the press may love the “human interest” angle of the poor, single mother who manages to fall into hopeless debt, from both legal and economic points of view, the relevant issues are elsewhere.
In the case of the law, Bersia paints a picture of a predatory industry that has simply bought the Florida legislature, which then refuses to place ceilings on interest payments. As Bersia gives story after sad story, he finishes with the phrase, “It’s all perfectly legal.” In other words, it may be legal, the writer notes, but actually the practice should be against the law.
However, when one examines whether or not an economic exchange falls within the boundaries of the law, the first and most important question is this: Has the vendor committed fraud? If the customer has been fully informed of the terms of the loan, then the vendor has not committed fraud. And if the customer fails to pay back the loan in a timely manner, that is hardly the fault of the lender.
The real crime, according to the editorial writer, is not that the poor are expected to pay back loans, but that the interest rates charged are quite high. He wants the Florida legislature to place interest rate ceilings, which Bersia believes will solve the “problem.”
In reality, the problem is not with the interest rates charged but rather with Bersia’s woeful lack of economic knowledge. Like most economic illiterates, Bersia believes that only lenders set interest rates and that borrowers are simply hapless victims. Economic analysis, however, tells a different story.
Austrian economists like Ludwig von Mises and Murray Rothbard long ago pointed out that interest rates come from the time preferences of borrowers and savers. Time preference is the desire to consume in the present as opposed to the future. An individual with high time preferences prefers very strongly to have command of resources at present, while a person with low time preferences is more willing to wait.
It is obvious that most persons seeking title loans have high time preferences. More importantly, their borrowing habits demonstrate that they are willing to pay those high rates of interest precisely because they have such a strong desire to obtain funds quickly.
To make matters worse, Bersia praises the Florida legislature for setting a ceiling of 18 percent on credit card loans in Florida, and wants something similar done for small lending companies and check- cashing firms. Proof of the man’s economic illiteracy is that he fails to see the connection between the credit-card interest controls and the growth of small, high-interest lending companies. The fact that the Florida legislature controls credit- card interest in that state means that a large number of potential borrowers are shut out of the credit-card markets and must turn elsewhere if they want to borrow money.
Interest rate ceilings for title-loan and check- cashing companies would almost certainly mean that a large black market in “loan sharking” would reappear in Florida, with even higher interest rates.
While Bersia complains about “loan sharking,” he fails to point out why such practices have always existed. Poor people and those with marginal credit ratings have always been shut out of conventional capital markets. Strict bank regulation by the state further restricts the availability of loanable funds. Thus, if poor people want to borrow money, they must turn to the least attractive sources.
The editorial series was so biased against small lenders that it reminded me of the old propaganda leaflets against the Jews and their money-lending practices. Nor did Bersia disappoint me in that category, either. In one of his editorials, he refers to a small lender who was reputed to be an associate of the famous mobster, Meyer Lansky, who was allegedly the “model” for the character of Hymie Roth, the Jewish Mafioso in The Godfather II. In other words, Bersia manages to slip in ancient ethnic prejudices to further inflame his readership.
No one likes paying triple-digit interest rates and, no doubt, if these “victims” of title-lending companies had better options, they would use them. The problem is that the politicians, in their efforts to “protect” consumers, actually close off avenues of credit for the poorest people.
It is easy to condemn people who loan money at high interest rates, and the Pulitzer Prize committee certainly fell into that common but wrong mode of thinking. However, if one were to rate prize-winning pieces for their adherence to truth, “Jimmy’s World” would be better than this latest Pulitzer outrage.
William L. Anderson teaches economics at North Greenville College and is an adjunct scholar of the Mises Institute (anderwl@prodigy.net).
