It came out in passing last night, in discussions with a smart 17-year old, that he got in deep trouble in middle school. He was accused of loan sharking, and forced to do detention.
See if you think there is anything wrong with what he did.
They condemn what they do not understand. The middle school cafeteria had candy machines. Every candy cost a dollar. My friend carried extra ones with him. He would buy candy, and immediately people would ask if he could loan them money. He did. More and more people asked. He continued to loan people money and only some would pay him back. His charity was losing him money.
So he had an idea. He would loan anyone a dollar. However, the next day they had to pay him two dollars. This was great because it weeded out people who were not serious about their candy needs, and got rid of those who had no intention of paying him back. His idea helped to ration his scarce resources. It had the additional advantage of making him some money, which incentivized him to make funds available.
Everyone was happy. He made money. They got their candy. Most everyone paid him back. If he began the week with $5, he ended the week with $10. This was nice. No one was hurt.
If a person was late in paying, he added an additional dollar for each day. Otherwise, why would people pay sooner rather than later? So if you borrowed one dollar on Monday, and didn’t pay until Friday, you would owe $5.
Of course he did have to start keeping books on who borrowed from him. He would sometimes have to hunt them down the next day. Sometimes people need gentle reminders, of course. Mostly people paid.
He was also rather merciful. Once a person got behind by three full weeks. She technically owed $15 on a $1 loan. He came to her and said, “let’s settle this debt today. I’ll take $10 and we can call it even.” She was relieved and happily paid.
My friend was making lots of money. And why? Because many students wanted candy and failed to make the proper financial preparations to purchase it. He was there to facilitate an exchange. They would get candy now, which is what they wanted, and he would be rewarded for anticipating their desires.
So far, I see nothing wrong with this at all.
This is not exactly a member of the Medici banking family here. However, you could express this in more severe terms. People often criticized payday loans for charging an annual percentage rate of 100-700%. Scandalous, right?
Well, think about the rate my friend was charging. It turns out to be 26,000%, based on $1 per weekday.
Keep in mind that we are talking about a 13-year old kid here. This is not exactly a member of the Medici banking family here. He was just trying to help people with a two-party win.
But as his financial holdings grew, and his practices became more formalized, his business became ever more lucrative. That’s when news of his empire began to leak to teachers and parents.
Predictably, there was mass outrage. He was hauled in and accused of “loan sharking.” There was a trial. He was declared guilty. He was put on detention and humiliated publicly.
Once he was out of the picture, kids no longer had any means of getting financing for their candy fixes. They just stood in front of the machines staring blankly. It’s hard to see how the overall middle-school economy was improved by this crackdown.
The response of the parents and teachers was a typical example of mob behavior against intelligent capitalist practices. It’s been going on for hundreds of years, particularly hurting people who make money with their minds through financial savvy.
This was the basis of anti-semitism from the middles ages through the Nazi period, since, as Milton Friedman has explained, Jews have traditionally specialized in the enterprise of money-lending.
And it goes on today, with all the frenzy against usury, payday loans, pawn shops, and so on. Even the Occupy movement sampled some of this populist outrage against money-making.
Damnant quod non intellegunt. They condemn what they do not understand.
I was a loan shark in middle school, too!
After school there were men with candy and ice cream carts waiting to sell to the students on their way home who often did not have any money. I gelatin printed (probably no one knows what that is) up loan contracts which my customers signed agreeing to pay 10% interest per week on what they borrowed. I had one “customer” who ostentatiously welched (I still remember his name: Alan Sitt :)) but most paid. I remember one case when I made a collection visit to one girl’s home. Her parents were clearly irritated but they paid their daughter’s debt.
That was over 50 years ago. I never got in trouble which probably shows how times have changed.
However, I did get shut down when I took a roulette wheel to school and set up a casino during lunch. I suppose that is another issue.
Usury Laws are an interesting topic from a Libertarian perspective, Jeffrey. Should they exist at all? Desperate people can be taken advantage of by unscrupulous people. Those who cannot pay are often subject to violence, or the threat of violence, by the holder of the debt.
Anti-trust activity where financial institutions collude to keep rates inflated are possible.
Certainly we can argue that the established and legal loan industry takes advantage of people through disastrous rates and fees disguised as “penalties”. That by allowing anyone to loan money at whatever rate they desire we create an open market.
That the attempt to solve the problem simply created worse problems.
Interesting topic at the very least. Thanks for the article.
Tom
A very sound young person. Forward that young lender my contacts.
How much do you want to borrow? 🙂
@tomlib
Tom
If both parties voluntarily agree to the terms, why would it be someone else’s business? If low end consumer finance activities, pawn shops, cash advance firms and the like made great returns on equity, there would be many more of them, but in truth, in this market ( the US) the rates they charge ( 59.5% in most jurisdictions) leave only market rates of return for the lenders.
The better retail credit markets ( major credit cards) that attract higher end risks (12-20% plus merchant discounts) are a better business, but no “barn burner.”
The correct answer to predatory lenders… ” don’t borrow”!
the plus side to his getting shut down? he’ll just find ways to get better at it. (that is, without getting caught)
Would we be comfortable if instead of a student peer, it was an adult providing said 26,000% loans? Probably not, because there is a level of protection we all agree minors need, due to their young age and likely ignorance of the consequences of their financial actions.
Good parenting is allowing your kids the right balance of freedom vs. protection… and at the age appropriate level. So you wouldn’t let your 16 year old do a cross country driving trip with his friends, but you might allow him to drive 1 hour to a nearby city if he’s been showing good driving skills and habits. You wouldn’t let your 3 year old go to the park alone 2 blocks over, but you might allow him to climb that huge playset for older kids, even though he might fall off, because he seems ready and willing. Kids need to make mistakes in order to learn, but not mistakes that could ruin them.
So back to the issue at hand, an enterprising young man is experimenting with loans. I don’t think he deserves any public official rebuke for it. But if parents don’t want their kids having this available to them at lunch, they have the right to petition the school to stop it. And the school has the right to ask him to stop. The punishment the kid got is silly. However, if he hypothetically continued his activity even after told to stop, it would be appropriate. Rebuke from parents is as natural and free market as anything else. School is a controlled environment with agreed upon rules. Even a private school. And if my son or daughter owed some classmate $15, I’d probably talk it through with them, make sure the lesson is sinking in, and suggest they avoid any future loans… and I’d make it clear I won’t be giving any money to them for paying it off. The loan offering kid is clever, and providing a service it’s true. But it’s only morally good if we assume all actors are acting rationally. We’re talking about minors here. Would a rational actor take this loan?
“Would a rational actor take this loan?”
It’s safe to assume all actors, as in 99% of them, are acting rational. However, that does not mean the decision is the wisest thing for their situation, of course this is life. As you seem to understand, but go back and forth on through the course of your comment, people need to be allowed to make mistakes, ESPECIALLY children. If you can’t, or don’t, learn while your’e young, you will make mistakes later which have far worse consequences. The example this young man set is beautiful, and inspiring, it’s a crying shame that people can’t be praising this sort of ingenuity, helping it to make children smarter and tougher…but no, instead they baby them, making them weak and vulnerable, and discourage them from being proactive and independent. What a shame.
The actions of the reprehensible, outraged parents and teachers is what appalls me the most about this. Did any of these supposedly responsible adults have the simple foresight to make available an extra dollar for their child, so their child wouldn’t have to turn to an intrepid entrepreneur? Apparently not.
So they decide that a mob of protest is more right than a single student who decided that he could help his fellow students with their candy problems.
This demonstrates exactly what’s wrong with state-based indoctrination campi (or is it campuses? That just seems awkward) today. Do they expect the minions to be able to do things for themselves when they graduate to the real world?
Thankfully, my son never saw the inside of one of these indoctrination centers. He probably would have been expelled the first week for demonstrating excessive entrepreneurial skills.
One more thing: I wonder if the kid paid his taxes?
If I were a parent who didn’t want my child eating candy out of the vending machine (and I would be one of THOSE parents), I would confer with the lender and explain that my child doesn’t have money for candy because candy is off the planned diet. From the story, it sounds as if the lender would comply and would not lend to my child. Person-to-person conferences are helpful and productive and don’t block others’ actions or preferences. Blanket, one-size-fits-all regulations are seldom useful.