Focus on alleged loan bias will benefit only bad risks - Bill Clinton's proposal race discrimination in bank loans - Column

Insight on the News, March 29, 1993 by Llewellyn Rockwell, Jr.

In one of his first regulatory attacks on the private sector, Bill Clinton has targeted the lending practices of the banking industry. This isn't surprising. Since at least 1848, statists have advocated political control over credit markets. Clinton's Justice Department has selected 200 banks for gimlet-eyed audits. And the Federal Reserve Board, the Federal Deposit Insurance Corp., the comptroller of the currency and the Office of Thrift Supervision will choose four or five banks as the "worst offenders" and make examples of them.

What's the crime? From statistical disproportionalities in lending data, the banks are accused of racial discrimination. The Federal Reserve has published reams of statistics on lending by race and found that blacks and Hispanics are turned down more often than whites. It also has found, but not exactly trumpeted, that whites are turned down more often than Asians.

These findings are consistent with what savings rates, asset levels, incomes, job histories and other data would predict. But true to the civil rights tradition, special interests have seized on statistical disparities as proof of discrimination.

Also influential is a local Boston Federal Reserve study by Alicia Munnell -- recently named Clinton's assistant Treasury secretary for economic policy. She adjusted for income and credit history (but not for other factors) and showed a black-white discrepancy of 6 percentage points.

If lenders were really passing over worthy minority borrowers, the rate at which white borrowers default would be higher than for other groups. In a Jan. 4 Forbes article, however, Peter Brimelow and Leslie Spencer point out that the Munnell study shows that whites and other groups have equal rates of loan default, exactly what one would expect from rational credit markets. What's more, Brimelow got Munnell to admit that while she believes discrimination occurs, she has no evidence. "No one has evidence," she added in her own defense.

The lack of evidence never stops the demagogue, however, and from her powerful post at the Treasury, Munnell will seek to toughen laws, strengthen government's investigative powers and widen the number of institutions covered. Judging also by a recent Senate Banking Committee hearing, the days of debating what data prove or don't prove are over.

Sen. Carol Moseley Braun, Illinois Democrat, has denounced present banking regulations as being without "any teeth, any muscle, any oomph." Munnell, like Braun and others, is ready now to put the bite on banks, good and hard. The oomph you hear is the sound of efficiency draining out of the economy.

None of these accusers seems to know anything about how credit markets work, which is much like other markets. There are goods for sale (lonable funds) that must be produced (by prior savings); they have a "price" (the time-determined interest rate); and they are allocated according to market-tested rules (creditworthiness).

We hear no charges about grocery stores or flower shops refusing to sell to blacks. Why should banks be different from other businesses? In fact, they are not. Lenders do not pass up opportunities to make good loans, because, like grocers and florists, they are driven by the profit motive. Competition between banks and other lending institutions provides additional incentives to be impartial. That's why the whole enterprise of snooping out discrimination in lending is futile and ultimately tyrannical.

Bankers know this, but given the current atmosphere in Washington and the culture, they are afraid to speak up. They have adopted a strategy of lying low, hoping to wait out the campaign against them. But this won't work. Statists want government rather than the market to allocate credit, because government could more easily control the entire economy.

Under government intervention, politics becomes more important than profits -- making us all poorer -- and justice is violated when people who deserve loans do not get them because the uncreditworthy do.

Once again, the welfare state will reward the ne'er-do-wells at the expense of the financially responsible, decreasing incentives to work and save. Instead of making the government look like America, the Clinton administration is making America look like the government. That may be change, but it is hardly progress.

Llewllyn Rockwell Jr. is president of the Ludwig von Mises Institute in Auburn, Ala.