The Inescapable Market for Credit
It is an undeniable reality of economic life that credit, like all goods and services, emerges naturally in response to demand.
Individuals will always seek loans because their financial choices are limited. These individuals borrow because they face circumstances where credit is the rational choice, given their alternatives.
Many of our overlords and commentators wish this were not so. They say we can eliminate the demand for credit products merely by imposing regulations or limiting supply.
Economic policy must be grounded in reality.
Credit markets exist because lower-income people view it as a viable solution to their immediate needs. Poverty or economic vulnerability may exacerbate their situations, but their choice to borrow is ultimately theirs.
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.
The bottom line is that policymakers should focus on improving credit options’ accountability and transparency rather than eliminating them.
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