(No need to respond to this point here—you can put it in response to TheOtherDave’s parallel comment)
(Responded.)
But it wasn’t that mild. Instead, the loans were simply turned down. The near-total absence of capital was crippling.
To repeat myself:
So? If they had offered a loan at 100% interest, people would be bitching anyway about discrimination. Maybe it is a calculated PR move that people will complain less about not getting a loan than about getting a loan at +2% interest; maybe it has to do with the fixed overhead of servicing loans; maybe they only had so much appetite for risk even if the interest rate were raised to make the loan +EV again; maybe this is an unexpected consequence of the millions of words of regulation governing banks.
Moving on:
A ‘being black’ penalty even of only 2% on loans would be colossal. Think how much debt a growing business has to incur, and compound that over the years. Apply it to choices of housing, of auto financing. Everyone in the community has less money, so they can’t buy as much, so businesses have a harder time growing, so people earn less. It’s self-perpetuating.
So, are you arguing that the ‘being black’ penalty is not accurate here? That the 2% penalty is compensating for risk that does not exist? If so then that’s quite an opportunity: a free 2% price cut. Especially in the current low-interest rate environment, that’s a lot of money being left on the table.
Or are you arguing that the penalty is accurate and anyone who tried to offer at non-penalty rates would lose their shirts as tons of loans defaulted?
I thought you were arguing against the latter, before… If you’ve changed your mind, it’d be good to say so clearly and explicitly before going on.
You persist in only looking at the effect on the banker. As I said, the regulation won’t make much if any sense from that point of view alone. Your pointing this out once more doesn’t really change anything.
That said, considering that the regulated banks had a low default rate until everything went screwy because of the (non-regulated) predatory lenders, I think I’ll stick with the theory that there was a market inefficiency.
Now, it wasn’t a simple barrier-free market inefficiency. If only one bank had moved, it could well have lost its shirt. Being the sole investor in a dead area is rough. It’s a bit like a many-player game with ‘staying out’ having a positive payoff from being able to invest elsewhere, and ‘going in’ having a payoff that starts out negative with no other cooperators, increases with cooperators for a while, peaks above ‘staying out’, then declines down to the ‘staying out’ level once the market is fully competitive (then below if it becomes saturated). When no one is there, you’d be crazy to move first.
Changing the rules so the banks had to serve their localities guaranteed a minimum level of going in, which made it no longer a bad move to go in.
(Responded.)
To repeat myself:
Moving on:
So, are you arguing that the ‘being black’ penalty is not accurate here? That the 2% penalty is compensating for risk that does not exist? If so then that’s quite an opportunity: a free 2% price cut. Especially in the current low-interest rate environment, that’s a lot of money being left on the table.
Or are you arguing that the penalty is accurate and anyone who tried to offer at non-penalty rates would lose their shirts as tons of loans defaulted?
I thought you were arguing against the latter, before… If you’ve changed your mind, it’d be good to say so clearly and explicitly before going on.
You persist in only looking at the effect on the banker. As I said, the regulation won’t make much if any sense from that point of view alone. Your pointing this out once more doesn’t really change anything.
That said, considering that the regulated banks had a low default rate until everything went screwy because of the (non-regulated) predatory lenders, I think I’ll stick with the theory that there was a market inefficiency.
Now, it wasn’t a simple barrier-free market inefficiency. If only one bank had moved, it could well have lost its shirt. Being the sole investor in a dead area is rough. It’s a bit like a many-player game with ‘staying out’ having a positive payoff from being able to invest elsewhere, and ‘going in’ having a payoff that starts out negative with no other cooperators, increases with cooperators for a while, peaks above ‘staying out’, then declines down to the ‘staying out’ level once the market is fully competitive (then below if it becomes saturated). When no one is there, you’d be crazy to move first.
Changing the rules so the banks had to serve their localities guaranteed a minimum level of going in, which made it no longer a bad move to go in.