Hacker News Reader

It's very hard to argue against this.

It is easy, but it gets political. The sketch of the argument is "Banks should not be allowed to make judgments which negatively affect certain groups of people disproportionately even if those judgments are accurate, because it is contrary to social justice. It would be better if substantially everyone paid more and/or if banks were less profitable if it meant that access to homes/credit/etc was improved for protected groups at the margins. We have a special obligation to do this because of our collective responsibility for historical and continuing inequities which directly result in the fact pattern which tends to cut against the interests of protected groups."

n.b. Not me talking there, just summarizing a view which is very popular.

Exactly. Or, in other words: The rich would get richer and the poor would get poorer.

If that's exactly what happened, the market would have already adjusted; no loan officer is going to say "I know poor people's social networks will indicate that they're even less responsible than they look on paper. I can't wait for them to click the 'login with Facebook' so I can finally act on that knowledge."

The actual effect will be more nuanced. This would be better at differentiating between, e.g. "People who can afford to regularly drink Johnny Walker Blue Label" (good credits), and "People who actually do" (less responsible).

Overall, it seems better to create rules that efficiently allocate resources, and then correct for inequality after the fact. That's better than creating defective resource-allocation rules as a way to keep things equal.

And please note that if you're right, you're arguing that right now, the rich subsidize the poor in this way. (I know, I know, that sounds extreme. But "Poor people only get these interest rates because it's hard to tell that they're deadbeats given current information" has to be true for your statement to work, here. You pretty much have to pick one: either this is factually wrong, and the banks that do this will lose money; or it's morally wrong, but actually does work, and we should prevent people from acting on useful information in order to let poorer people gently defraud them. This is analogous to plenty of previously or presently disastrous situations, in e.g. mortgage lending, health insurance, and student loans.)

Aren't the rich always going to get richer, no matter what? Holding all else equal, the rich have more capital to put to work than the poor.

Within one lifetime, probably so. The next generations might add more money, or spend it all.

There is an old proverb "from shirtsleeves to shirtsleeves in 3 generations". (http://answers.yahoo.com/question/index?qid=20080114145024AA...)

In some cases this can take longer:

"Six Waltons Have More Wealth Than the Bottom 30% of Americans" (http://finance.yahoo.com/news/six-waltons-more-wealth-bottom...)

But if it does work, then overall mortgage rates will marginally decline.

Or the banks will just raise the profit margins.

Some people will suffer, but keep in mind that when those people oppose this, they are saying "I want to hide material information from the people with whom I do business; if they knew the truth about me, I would get a worse deal." That's fraud.

What about "my bank has no business spying on who my friends are or what I do on my free time"?

This raises the cost (possibly prohibitively, if the number of people who refuse to give out an account is so small that banks can outright refuse credit to them) to anyone who isn't willing to sell out their privacy, and more importantly, their friends'.

And of course, people like me who just don't have an account are outright fucked.

Banks are in a competitive industry; if their costs go down, they'll cut rates to increase sales, unless there's some implicit or explicit cartel behavior that keeps them in line. But if that were the case, you'd expect banks in general to be more profitable.

Your bank is in the business of figuring out how likely you are to repay loans. They'll probably ask you these questions, since answering them makes you a better customer. But refusing to answer puts you in a low credit-rating bucket.

Banks already use your transactions to figure out how creditworthy you are. If you want to avoid that, you can do all your business in cash, but you will pay for it if you ever want a mortgage. All they're doing is offering you the option: if your privacy is worth, say, 2% per year on a $100K mortgage, then go ahead. But for lots of people, privacy has value, but not an infinitely high value.

You can argue that it's unfair for your desire for privacy to imply that you have something to hide. But if you do, better blame the people who do have something to hide and claim that they just believe in privacy: if such people didn't exist, you would be able to maintain your privacy at a much lower cost.

Maybe you could use a real-world example. Let's say you're hiring an employee, and your employee casually mentions that he changed his name last year. "What was your original name?" "Not telling." "Did you do anything that would give you a good reason to change your name?" "Not telling." "Can you tell me who you used to work for under your previous name, and why you're no longer there?" "Ugh. Stop trying to violate my privacy. Just assume that I have good reasons not to tell you information that you would use to make a reasonable decision; it's totally unfair to lump me in with people who would do that to cover up something terrible they've done, or some unsavory associations they have. I'm not one of those people. Trust me."

Or the banks will just raise the profit margins.

A bank doesn't operate alone in a vacuum. As the number of people who have prime credit shrinks the competition to lend to those people will go up. They can't simply raise profit margins because there is always another lender out there who will be happy to take on a prime credit borrower.

Unless of course the banks agree--off-the-record if need be--to not undercut each other because they realize they will all lose by doing so.

I don't think that's practical. In an industry with very few players, it could work, but there are tons of small banks, credit unions, and online banks. Do you really think the big banks could convince every single one of them to just accept their share of the pie and stop trying to compete?

There's many small banks like you say, but the impression I get (I have not done the research to back this up) is that the few really major banks (i.e. Bank of America) have a huge market share. Again, I have not researched this, but just from day-to-day experience, it sure seems that way.

Edit: http://www.cardhub.com/edu/bank-market-share-by-deposits/ According to this site, the market share of the top 10 banks is about 45%. Those statistics are not highly precise but it illustrates the point I am trying to make.

> And of course, people like me who just don't have an account are outright fucked.

That's not necessarily true; the models might predict that people who don't have accounts may be more creditworthy.

I don't see how would they distinguish "doesn't have an account" from "doesn't want to give it because his friends are deadbeats", so I find it hard to believe that group will be more creditworthy.

Your mistake is in assuming fully rational actors.

If we were talking about the general population, I would agree with you. Something tells me that actuaries are quite rational actors though.

A couple notes: lower credit scores mean higher rates. If a loan applicant is just as low a real risk as they were last month, but now has a social-signal-adjusted credit score that is lower and thus demands a higher interest rate, the bank will make more money.

Bad signals applied uniformly across the industry can be massively profitable.

Second, lowered risk hasn't had much impact on rates. Increased risk, as we saw banks take on during the bubble, led to very low mortgage rates. Whereas, absent federal programs to encourage refinancing, current rates are often higher than five years ago, for people of the same credit risk.

Another example of this would be the bankruptcy "reform" laws that made it very hard to discharge credit card debts. These have dramatically lowered real risk for US banks, but no corresponding drop in credit card rates has been seen. Again, contrary to what simple economics would predict, rates are often higher than they were before the reform for the same people.