Wrong thinking (again)

Earlier this week Ed Miliband made another of his announcements in which he single-handedly will save the people of Britain, particularly the impoverished ones.  This weeks announcement made it clear he is looking to tackle the payday loans companies that so many people are struggling with, particularly their interest rates. The gist of his announcement is that he will impose a tax on them to raise funds for the growth of credit unions.

This all sounds very noble and it would be except it's more a demonstration in one dimensional thinking from the party who purportedly wish to change the lives of the working classes, yet have left them in the same position for decades.

If we want to understand part of the problem with his idea we have to look at credit unions. If we simply go back to May this year, we see that even the Guardian reported that all is not rosy for the credit union market.  Whilst the article reports on an overall growth, it also reports the that, on average the market is also losing one credit union a month. Within that article the most telling observation is that by Paul Brindley from Midland Business Recovery in which he suggests:

..many are being deprived of much-needed cash because of a combination of factors. They can't lend enough money to enough people who are willing, and able, to repay because of their rules on responsible lending. Meanwhile, when debtors get into trouble, they will often repay the payday loans with high interest rates first, and leave the credit unions until last for payment. And the courts are "taking a lenient stance", often allowing people to pay off their debts at perhaps just £5 a week.

Its there that we see the true nature of the problem.  It's not the interest rates they are charging that is the core problem (although it is a disgrace).  The true problem is that a market exists in which payday loans companies can thrive on the terms that they do.  Taxing the loan firms will not solve that.  All that will happen there is that the tax burden will simply get passed to the consumer as it always does, compounding the problem further.

One of the big problems of these consumers is their credit risk profile.  Many of them take on payday loans because they can no longer source funds from the main high street lenders, who after years of free and easy credit availability have tightened up their rules.  Credit unions will often be no different.  As "ethical" businesses, they have responsible lending woven in to their business model, so many of their potential customers will still find payday loans companies are the only option.

As I say the problem is that a market for them exists and this is where Miliband has missed the point. He has come up with a simplistic plan that's as thin as the only place it looks good in - the newspapers.  He has to realise this.  If he doesn't you've got to question his ability.  If he does understand it, then he needs criticising for his cynical play for cheap headlines. 

What is really needed is a culture and policy in which there is no market for payday lenders.  If he truly aspired to help, he would think seriously about how to collapse the market by raising the education of its population who can raise funds in a way they can manage without spiralling into deep debt and lift themselves out of poverty.  Part of the way to that is to have government that gets out of the way, stops taxing everything that breathes and creates conditions in which British industry thrives, grows and has a reservoir of highly educated and talented people to fuel it.