Why Is It So Challenging for Poor People to Borrow Money?

Why is it so difficult for poor people to borrow? Most readers are not unreasonably asking why such a silly question would rate asking.

That poor people can’t borrow is plainly a consequence of their poverty. Precisely because they lack means, they’re not necessarily a good bet to pay back monies borrowed. Basic stuff. And since it’s basic, it’s also a statement of the obvious to point out that poverty, a lack of means, a lack of credit history, or all three factor into the higher rates that poor people borrow at, assuming they can borrow. In other words, a Federal Reserve at “zero” followed by “costless” credit is the imaginary stuff of pundits, not something that is in any way indicative of reality. This truth reveals itself most notably when it comes to poor people.

Let’s call them subprime borrowers. What the Fed does is of no consequence to them. To see why, we need only pivot to the Predatory Loan Prevention Act. Passed in Illinois in 2021, the law was given life by legislators concerned that the poorest in Illinois were being charged usurious rates of interest for small-dollar loans. With an eye on protecting these borrowers, legislators placed a 36% cap on the rate of interest that could be charged these borrowers.

Ideally the cap first raises a question among readers about what the Federal Reserve thinks it’s achieving with its occasional lurches toward “zero.” If we’re being realistic, the latter doesn’t have much of an impact on 99.99999% of borrowers. And for those that it does impact, they can already borrow cheaply in the first place because they’re rich, have means, and they have a good credit history. In other words, markets always and everywhere have their say. Particularly on the matter of money.

That markets have their say arguably answers the other question that hopefully arises among readers: don’t price controls lead to scarcity of that which is artificially controlled? The answer is yes. Certainly in theory, but also in reality. We know this simply because economists J. Brandon Bolen, Gregory Elliehausen, and Thomas Miller conducted a detailed study about the consequences of the Predatory Loan Prevention Act, and found that loans to subprime borrowers in Illinois dropped substantially after the imposition of the rate cap.

The simple truth is that there’s no such thing as dumb money. And with savings, there quite simply can’t be such a thing as “dumb money” simply because the cost of loaning out money in blithe fashion is steep. Think the immense power of compound interest.

Ok, but what does all of this have to do with budget deficits and the debt ceiling? Hopefully it provides clarity on the matter of why we have the deficits that spark debates about the debt ceiling with such frequency.

The wildly simple answer is that the U.S. Treasury is incredibly rich based on its revenues being a function of the productivity of the world’s most productive people, the American people. The U.S. Treasury has also has a sterling credit history. See the previous point.

In short, as a borrower the U.S. is the opposite of subprime. Which means we have deficits of gargantuan size precisely because Treasury collects humongous amounts of revenue and is expected to collect exponentially more revenue over time. The deficit and debt ceiling debates are merely symptoms of U.S. Treasury revenue collection in staggering amounts.

Hopefully from this readers can gather that a focus on budget deficits and debt ceilings is misplaced. They’re once again symptoms of a much bigger problem: Treasury collects way too much in the way of revenue. Absent our addressing the real problem, expect debates about the symptoms to continue without resolution.