From: "Timothy C. May" <tcmay@got.net>
Date: Wed, 11 Dec 1996 12:00:35 -0800 (PST)
To: cypherpunks@toad.com
Subject: Re: Redlining
In-Reply-To: <01ICVRTK0606AEL6R8@mbcl.rutgers.edu>
Message-ID: <v03007802aed4c09f8265@[207.167.93.63]>
MIME-Version: 1.0
Content-Type: text/plain


At 11:31 AM -0400 12/11/96, E. Allen Smith wrote:
>From:	IN%"mjmiski@execpc.com"  "Matthew J. Miszewski" 11-DEC-1996 03:52:03.23
>
>>This is the essence of, at least, my disagreement with you Red.  I dont
>>agree that redlining doesnt harm people.  You see no harm.  I do.
>
>	Of course redlining causes harm to those who are redlined... they
>can't get credit. But the same can be said of any system of keeping
>track of who is likely to repay credit; it means that someone who has
>defaulted on past loans won't get future ones. Quite simply, while I
>would agree with you that racism certainly persists (it would be
>difficult for me to grow up in the South and not see this), I would
>argue that you have no evidence for that the basic motivation behind
>redlining is that the people in such areas are less likely to repay
>credit.

Whether to offer credit to some entity is, like many other such
transactions, an economic transaction which involves a number of factors:
interest rates charged, other uses for the money, expectation of payback,
government interference (distortions of markets), etc.

As with insurance in all its various forms, the decision process involves
_probabalistic assessments_ based on avialable information, such as from
past payback data, actuarial tables, the legal system, etc. By the nature
of such probabalistic assesments, certain "lumped" categories will have to
be used: age groups, sex, For example, here are just some obvious areas to
consider:

- age -- if under-25 persons have a 20% higher default rate on loans, "for
whatever reason," this will be a factor in setting rates or even in
granting a loan

- sex -- if women are generally twice as likely to repay a loan, this will
be a factor

- ethnicity -- if persons of Norwegian heritage are 4 times less likely to
default on a loan than persons of Blatislavan heritage are, a loan officer
would factor this in (absent government market distortions)

- education -- if college-educated persons are less likely to default than
high school dropout, etc.

...and so on...one could make a list of several dozen categories, then run
correlation tests of various sorts. This is clearly what banks and other
lenders do in establishing loan criteria.

Nothing new here.

What is lost on many people who denounce "racism" and demand that banks
give equal percentages of banks to various allegedly aggrieved "oppressed
minorities," based on various quotas, is that the loan process is almost
totally driven by _greed_, as it should be. Any bank which practices
"stupid racism," e.g, by ignoring good payback prospects because of
tangential or unimportant criteria, faces lost business.

That the composite effect of lending criteria studies is that relatively
few inner city blacks who failed to graduate from high school and who have
menial jobs are offered credit is not a function of racism, but of these
correlation studies.

Sometimes other criteria can become domiant, such as "loss of face" in
Asian cultures if a loan is defaulted upon, especially a loan made by other
members of one's ethnic community. This explains the success of the private
lending pools many Asian communities have.

Blacks who feel "discriminated against" would do well to emulate this
example, instead of demanding that Massah in the Big House fix things for
them by government distortion.

(Note that one way commercial banks have of avoiding the problem of quotas
on loan applications is to simply not have offices in inner cities or other
areas of poor credit prospects. This has been one of the main effects of
government distortions of free markets in credit.)

--Tim May

Just say "No" to "Big Brother Inside"
We got computers, we're tapping phone lines, I know that that ain't allowed.
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