Grinding Out Pork to Cover Bad Loans : What lenders call ‘prudent,’ politicians call ‘discrimination’; the solution--a tax-subsidized ‘community development bank.’

Banks are in political trouble because people don’t understand that they are businesses selling a product. Instead, they are seen as quasi-public agencies providing a “community service,” and since they don’t provide the same service to every customer at the same price, they are accused of discriminating.

Some businesses sell food. Others sell clothes, shoes, appliances. Banks sell loans. That is, they will finance the purchase of a car or a house when the person lacks the cash purchase price.

This makes the bank’s product different. When a person leaves the supermarket with bread and milk, the grocer has the person’s money (or food stamps). But when a person leaves the bank with a loan, the banker has the person’s promise to repay the loan with interest over a number of years. Clearly, it is important to the banker, his depositors and the taxpayers who ultimately insure his deposits that the loan is likely to be repaid. Bankers who lend without careful regard to credit-worthiness and the prospect of default soon have themselves, their depositors and the taxpayers in serious trouble.

Over the years, rules and guidelines have evolved to ensure that lending is prudent. These rules are now in trouble because they have disparate impact: Lower-income people with bad employment records have a harder time getting loan approvals than upper-income people with good job records. In a Marxist country, this disparate impact would be called class discrimination. In the United States, it is termed racial discrimination.

In a cleverly crafted piece of propaganda called a “study,” the Federal Reserve Bank of Boston found racial discrimination in the fact that a larger percentage of black applicants for home mortgages were turned down than white applicants. The Comptroller of the Currency has a similar “study” under way. The purpose of these “studies” is to pressure bankers into permitting a percentage of their assets to be tapped by politicians for use as political patronage for inner-city constituencies. In order to avoid discrimination charges and penalties, bankers will have to push risk parameters beyond a prudent point. To buy peace from community activists, banks will have to make more risky loans.

If the banks’ profits suffer, the flow of credit to poorer areas will be impaired. Not to worry; President Clinton has already anticipated the problem. His solution is to start up a community development bank fund with an initial $400 million federal appropriation. This new political slush fund will dole out money to community development banks which, in turn, will lend to residents of low-income neighborhoods.

Let’s think about this for a minute. Private banks in poor areas already experience regulatory difficulty in diversifying their lending and deposit bases. Now the government is pressuring them to make bad loans even while the government creates and subsidizes competitors operating with federal appropriations.

It looks as if inner-city banking will become socialized, with any surviving private banks at the mercy of shakedowns by politicians and community activists. Such banks would be private in name only. Since investors can see the writing on the wall, the consequences of these destructive policies will be less private credit flowing into “underserved” low-income areas. Loans will become welfare items, just like food stamps, public housing and child support.

Clintonistas see this as a great development. Loans will have become a “right,” not something one gains access to through a pattern of responsible behavior. Merit will have suffered another defeat at the hands of those whose agenda is equality of result.

In a series of propagandistic articles last month, the Washington Post found disturbing disparities in the fact that “the largely white suburb of Chevy Chase” has more banks serving it than the “mostly black and mostly poor residents east of the Anacostia River in Ward 8.” The Post saw this disparity as “part of a larger pattern of inequality in banking found throughout the Washington area.”

The Post would find the same disparity in BMW dealerships and Oriental rug stores. Businesses locate where the business is. It is absurd to see racial discrimination in every business decision. If white people are too racially prejudiced to sell minorities loans, why would they sell them groceries, clothes, appliances and cars?

The straight story is that banks and their investors are being set up for plunder because that’s where the money is.