Victimological Banking

By Llewellyn H. Rockwell, Jr.

Soon after the L.A. race riots, the Federal Reserve announced that it too would play a part in the new welfare order. To meet the "special needs of the inner city," said the Fed, banks should race-norm loan applications to make sure that the same percentage of blacks get credit as whites. If the loans didn't work out, the Fed promised to ignore them in assessments of the banks' worth.

The Fed first became a social welfare agency in the 1970s, when liberals accused the banks of "redlining," i.e. drawing a red no-loan line around black areas on the map. But this was absurd. If a bank turned down creditworthy black customers, other banks would make the loans, and the profits. Competition ensures industry-wide fairness.

But an appreciation of the market has never been a part of the civil rights movement, whose founder – Martin Luther King – described himself as a "Marxist" in economics. Civil rights leaders wanted legislated largess, and the Nixon and Carter administrations complied, with the Home Mortgage Disclosure Act of 1974 and the Community Reinvestment Act (CRA) of 1977.

These were the first official steps toward affirmative-action banking. Banks were now supposed to give business loans to firms destined for failure, and home mortgages to those unlikely to make payments over a long term. Good risks, after all, were already getting credit.

But none of this was enough, said civil rights leaders, and so the Reagan administration included stronger enforcement in the 1989 S&L bailout bill. The Fed would keep track, and publicize, the CRA records of banks. Poor compliance meant a government crackdown and media protests by the fiduciarily underserved.

All this was before the L.A. riots, which stimulated even more central banking welfarism. Surprisingly, such actions had the approval of the Wall Street Journal, which last March told us that "Federal Data Detail Pervasive Racial Gap in Mortgage Lending."

According to the Journal, which had analyzed the data collected under the Reagan law, "if you're black, it's twice as likely your mortgage application will be rejected as it is if you're white. And if you live in a low-income neighborhood, chances are that many lenders have little interest in mortgage-lending in your community anyway." The paper called this a "grim summary of racial disparities."

The story, which took up four entire pages, even listed the welfare-compliance ratings of various banks and a map, as if to provide directions for the creditorally challenged.

As you might expect, the survey demonstrated nothing of what the Fed and the Journal claimed. Readers of the small print noted that the study purposely ignored the credit ratings, job histories, and debt levels of applicants! In other words, if a deadbeat job-hopper was turned down for a mortgage, the Fed and the Wall Street Journal chalked it up to race bias if he was black.

The facts of financial life, whatever root causes we want to attribute them to, is that on average blacks have poorer credit ratings than whites; that the median financial assets of black families is 11% that of white families; and that twice as many blacks are unemployed as whites. It follows that blacks as a group will qualify for fewer loans, even though any banker with a brain is desperately seeking qualified black applicants.

Is it racism, as we're told, for banks to be reluctant to lend on slum housing? No, for slum housing is less liquid then non-slum housing. The number of potential buyers is much smaller, so the banks are only acting prudently.

Also refuting the study and the story was the fact, not exactly trumpeted, that Asians qualify more often for mortgages than whites. Are U.S. bankers yellow supremacists? No, they simply recognize that Chinese, Japanese, and Korean Americans are, on average, financially more successful and responsible than whites.

The Journal followed up its article with an op-ed signed by Alan Keyes, a black neo-conservative and Republican U.S. Senate candidate in Maryland. The piece argued that loan officers are "racist" if they try to "find something wrong with the application"! such "racism in lending," the Fed needs to create "incentives for banks and other institutions to do what is right," i.e., "to support minorities who want to obtain mortgages." Regardless of whether they qualify.

What are the incentives Keyes wants? Mostly, for the Fed to reduce reserve requirements, i.e. allow more inflation, for banks that make loans to unqualified minorities.

But a grant of state privilege, whether enforced by the EEOC or the Fed, is inconsistent with justice and the rule of law, let alone sound economics.

Victimology makes no more sense in banking than in any other area of our society. It is bad social policy, bad monetary policy, and a reminder of why we should not allow the government to have monopoly control of the lifeblood of the economy, money and credit.