[VIEWPOINT]Good intentions, but a bad policyThe Ministry of Justice recently announced a plan to revive the law that limits interest rates charged on loans to less than 40 percent per year. The ministry intends to revive the law, which was annulled during the foreign exchange crisis in January 1998, after eight years. The law is designed to protect the lower class, which suffers from extremely high interest burdens, by setting an upper limit on the rates. In other words, it aims to alleviate the pain felt by people forced to get money from usurious loans. The government deserves applause for trying to support and protect the socially weak.
However, there are times when a policy introduced with good intentions causes unwanted effects. This happens when improper policies, meant with good intentions, go against market principles. There is a danger that the interest rate limit law will become one such example.
Let’s figure out what will happen in the market if the upper interest rate limit is set by the law. The Ministry of Justice seems to think 40 percent is a highly usurious rate, since the lending rate of most registered financial companies is under 10 percent per year. For them it is the highest rate they have ever known.
However, the loan business law allows authorized loan companies to receive as much as 66 percent interest per year.
There are, in reality, many people who borrow money despite such high rates. Who borrows money from these loan companies? They are the people who cannot borrow from banks that have low interest rates, or from mutual savings banks that have a slightly higher rate than banks.
Because they have nothing to give as security and their credit ratings are poor, the financial companies do not lend them money.
These people go to loan companies to borrow urgently needed money, despite high interest rates. There is no reason for the loan companies to lend money readily to these people at low interest rates, because they are not charity organizations.
The risks that people will not pay back the loan in time or won’t pay it back at all are included in the high interest rates of the loan companies.
There are people that even the loan companies won’t accept. Their credit ratings are in such a poor state that the money lent to them is likely to become irrevocable.
These people go to the private loan market, which has ultra-high interest rates. The private loan market is a black market with no interest rate limit and no regulation of the financial supervisory authorities. It is where the pressure of those high interest rates has even caused family break-ups or suicides.
If the upper limit of the annual interest rate is set at 40 percent by law, many people who could borrow money from loan companies will have no choice but to go to the loan sharks.
The good intention to ease the burden of high interest rates might end up depriving the people of the chance to use registered financial companies, forcing them under the yoke of ultra-high interest rates.
Good policies that ended up bringing unintended negative effects usually come from political populism that goes against the market principles.
Regulating housing rent is a good example. Some U.S. cities limited the amount of rent landlords could get from tenants. It was intended to ease the burden of housing expenses for the lower class.
Tenants were happy with the policy for a short while, but as time passed, the side effects of the policy became apparent. A huger number of tenants began trying to get inexpensive homes, and it became harder still to find homes. Housing companies did not build new houses because there was no reason for the landlords to manage existing rentals properly.
As a result, the houses for rent in the cities became desolate, and tenants were driven to a worse living environment than before.
Referring to that case, an economist said, “Restricting rent is the surest way to ruin a city, next to bombing it.”
The real estate policy, in which the present government spares no effort, falls under the same category.
The policy, which was introduced to help people without homes buy homes, is having the effect of raising house prices, making it even more difficult for ordinary people to buy a home.
A good policy must, most of all, obey the principles of the market.
* The writer is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo
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