The Volokh Conspiracy - Don't Try to Pawn your Movado (But Your Rolex is OK):

A few weeks back I noted that the retrenchment of consumer lending had led to the revival of layaway as a form of consumer credit, which consumers had abandoned over the past decade or so as an inferior option to credit cards.

Yesterday's WSJ brings tale of the growth of pawn shop borrowing by middle and upper-middle class consumers and small businesses as another response to the drying up of consumer credit:

Typically, pawnshop customers have a household income of about $29,000, according to Dave Adelman, president of the 2,400-member National Pawnbrokers Association. But operators around the country say they are seeing a surge in new activity fueled in part by a different clientele: middle- and upper-middle-class customers facing ravaged stock portfolios, tightened bank credit and unexpected layoffs. In areas dogged by high unemployment and foreclosure rates, the pawn business is especially robust.

Rick LaChappelle, owner of four pawnshops in Maine, calculates he has lent about 33% more money this year than last. "The banking industry is not giving out any money right now," he said. "So people are relying on second-tier lending institutions."

While some pawnshops -- like Beverly Loan Co. in Beverly Hills -- have discreetly served the wealthy for decades, more stores, such as Society Hill, are newly awash with furs, diamonds and other baubles from the bubble. At places like Society Hill, transactions are up by as much as 40% in recent months.

Even Beverly Loan has seen a shift in customer patterns. "We have had so many $50,000-plus loans and more businesses [as clients] than ever before," said Chief Executive Officer Jordan Tabach-Bank. Many business clients, he said, are "getting loans to meet payroll or other obligations because their lines of credit are frozen."

The more general policy lesson here is to recognize the substitution of consumeres among different types of consumer credit and that adopting policies that make it more difficult for consumers to gain access to certain types of consumer credit (credit cards or installment loans) will often force consumers to rely on inferior forms of consumer credit (pawn shops and layaway plans). Restricting the supply of credit (or some types of credit) does not eliminate demand (or the nead) for consumer credit.

I expect we'll see more stories like this if better forms of consumer lending continue to be dry and especially if new regulations are imposed that raise the cost of consumer lending. The Federal Reserve has just issued new regulations that will raise the cost of credit cards and restrict supply, but at least won't go into effect for some time. But as consumers are relying more on fringe-lending products as a substitute to the drying of good credit options, the boom in pawn shops and other fringe-lending operations may lead to further regulation of these products that will reduce their usefulness and availability as well. Many states, for instance, seem to be considering new regulations on payday lending. The biggest concern of all is that if all of these options get snuffed out we may see consumers pushed right out of the legal market completely, leading to a rise in illegal loan-sharking activity, both for consumers and small businesses. Although some growth in illegal lending is probably inevitable as a result of the combination of problems in the credit markets and poorly-conceived regulations, let's hope that this effect will be small.

	[Todd Zywicki, December 31, 2008 at 9:04am] Trackbacks Don't Try to Pawn your Movado (But Your Rolex is OK): A few weeks back I noted that the retrenchment of consumer lending had led to the revival of layaway as a form of consumer credit, which consumers had abandoned over the past decade or so as an inferior option to credit cards. Yesterday's WSJ brings tale of the growth of pawn shop borrowing by middle and upper-middle class consumers and small businesses as another response to the drying up of consumer credit: Typically, pawnshop customers have a household income of about $29,000, according to Dave Adelman, president of the 2,400-member National Pawnbrokers Association. But operators around the country say they are seeing a surge in new activity fueled in part by a different clientele: middle- and upper-middle-class customers facing ravaged stock portfolios, tightened bank credit and unexpected layoffs. In areas dogged by high unemployment and foreclosure rates, the pawn business is especially robust. Rick LaChappelle, owner of four pawnshops in Maine, calculates he has lent about 33% more money this year than last. "The banking industry is not giving out any money right now," he said. "So people are relying on second-tier lending institutions." While some pawnshops -- like Beverly Loan Co. in Beverly Hills -- have discreetly served the wealthy for decades, more stores, such as Society Hill, are newly awash with furs, diamonds and other baubles from the bubble. At places like Society Hill, transactions are up by as much as 40% in recent months. Even Beverly Loan has seen a shift in customer patterns. "We have had so many $50,000-plus loans and more businesses [as clients] than ever before," said Chief Executive Officer Jordan Tabach-Bank. Many business clients, he said, are "getting loans to meet payroll or other obligations because their lines of credit are frozen." The more general policy lesson here is to recognize the substitution of consumeres among different types of consumer credit and that adopting policies that make it more difficult for consumers to gain access to certain types of consumer credit (credit cards or installment loans) will often force consumers to rely on inferior forms of consumer credit (pawn shops and layaway plans). Restricting the supply of credit (or some types of credit) does not eliminate demand (or the nead) for consumer credit. I expect we'll see more stories like this if better forms of consumer lending continue to be dry and especially if new regulations are imposed that raise the cost of consumer lending. The Federal Reserve has just issued new regulations that will raise the cost of credit cards and restrict supply, but at least won't go into effect for some time. But as consumers are relying more on fringe-lending products as a substitute to the drying of good credit options, the boom in pawn shops and other fringe-lending operations may lead to further regulation of these products that will reduce their usefulness and availability as well. Many states, for instance, seem to be considering new regulations on payday lending. The biggest concern of all is that if all of these options get snuffed out we may see consumers pushed right out of the legal market completely, leading to a rise in illegal loan-sharking activity, both for consumers and small businesses. Although some growth in illegal lending is probably inevitable as a result of the combination of problems in the credit markets and poorly-conceived regulations, let's hope that this effect will be small.