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Three Areas Of Potential Financial “Reforms” – Pay Day Loans, Lotteries & Venture Capital

6 May 2010 3 Comments

Financial reform is a hot topic these days in the corridors of the White House and the Capitol building.  Obama is pushing his reform agenda big time.  Today, let’s examine the motivation.  In doing so, let’s look at three areas where financial reform might be applied – note: only two of the following are actually being proposed.

Pay Day Loans

Under the umbrella of “consumer protection”, the Democrats want to put greater restrictions on Pay Day Loans.  The reason: they’re a rip off and they hurt people.  Ok, no problem there.  They are a rip off and many times people do get hurt from them.  However, let us look at this objectively.  Is there ever a case where this type of financing or funding is needed for an individual?  What if someone is out of cash and needs to replace a transmission on their vehicle.  Without their vehicle, they can’t get to work.  In order to pay the mechanic, they take out a pay day loan.  When they get their next pay check, they go and pay off that pay day loan.  What’s wrong with that?

The reality is that eliminating options for consumers does not protect them.  Creating more options for consumers is the way to protect them.  Pay day loans, which are by no means a great way to get money, does have a purpose, it has a market, and it is an option for some consumers.

Reason for reform: Individuals aren’t smart enough to make their own decisions and aren’t responsible enough to manage their finances on their own.

Potential other reason for reform: Pay day loans are in the private sector.  Might the government want the typical customers (poor people) of these products to look to the government instead?

The Lottery

Ok, on to the lottery.  This area is not being proposed for reform, but let’s look at it anyways.  Why?  Because it’s arguably as bad or maybe worse for consumers than the pay day loans just discussed.  Let’s face it: almost all people who participate in the lottery end up losing money.  It is probably 99.99% of people lose by playing the lottery.  Yet, why do we ignore this?  Because the lottery funds the state programs of course.

If the lottery were a Wall St. product, you would have Senators on both sides of the aisle demanding reform, calling hearings, and giving the executives that are profiting from it an earful on Capitol Hill.

Reason for no reform: It benefits and funds the state

Venture Capital

Last area we’re going to look at… venture capital.  Venture capital is used to fund startup businesses which end up growing the economy, creating jobs and yes, making people rich.  However, most startups fail, so venture capital is a risky game.  Yet a necessary game for a growing economy.

What did you say?  Private enterprise resulting in people potentially getting rich?  We need reform!  And that is exactly what is being proposed.  Senator Dodd wants venture capital to be run through a government official.  We simply can’t have this kind of economic activity happening outside the scope of government.

Reason for reform: Private enterprise + big bucks = government intervention


Ok, let’s look at some possible reasons for financial reform and then decide objectively which ones are the driving forces here.

Reasons for financial reform:

  1. Consumer protection
  2. Protect the overall economy
  3. Increase government control

So, all the politicians are going around claiming reasons #1 and #2 are behind financial reform.  Let’s look at consumer protection first.  Pay day loans are an easy target here, and they’re going after them.  But, like I said, eliminating financing options isn’t really protecting the consumer, and if that were really the end goal, why not eliminate predatory gambling systems like the lottery which unquestionable hurts many, many low-income people?  Therefore, I’m scratching reason #1 from possibilities.

Moving on to #2, protecting the overall economy.  Ok, regulating pay day loans really doesn’t do much for the economy either way.  So, does regulating venture capital protect the economy?  I would 100% say no.  Making it tougher and more cumbersome for investors to invest in growing and starting businesses is terrible for the economy.  No regulation here is needed.  Why?  Because the failure rate is so high and most venture capitalists LOSE money versus make money.  It’s a very risky game, but one that actually allows and encourages economic growth.  As such, I’m scratching reason #2 as well.  On a side note, why don’t we focus on Wall St.?  This bill doesn’t even do that!  Did you know the CEO of Goldman Sachs (the biggest player on Wall St.) has said that the proposed financial reform will help Wall St.?

There’s only one left folks.  Reason #3.  Government control over the economy is the goal here.

Tell me I’m wrong.  I’m all ears.


  • wingtipwalker said:

    I think you've hit the nail squarely on the head…although I doubt we hear this in the media. Instead we will hear how, "President Obama is saving us from the greedy capitalists!"

    The bad news is we're in the growth phase of a tremendous populist movement across the country, the good news is that (historically) populism abruptly subsides as a movement when the hysteria dies out and people realize they are shifting all of the power and control from the greedy market to the greedy-er politicians.