Friday, November 11, 2011

Danger from the Pursuit of Fairness...

Academics often confuse fair-play with fair outcomes.An example of confusing fair-play with fair outcomes is economist Noreena Hertz, who wrote an editorial in the FT titled, "Women Still get a raw deal in business and finance". In her article, she states,

"That banks could be discriminating against women customers should not come as a complete shock. In the US, banks deemed single women poor credit risks until the 1968 Fair Housing Act. Until the Equal Credit Opportunity Act of 1974, women had to have a co-signor to become mortgage borrowers and before the 1975 Sex Discrimination Act in the UK, banks were legally able to reject a woman’s loan request because they were not seen as a good risk. In the absence of clear legislation and a commitment to enforce it, discrimination historically has been the default"
The thesis of the article is that banks unfairly discriminate against women and refuse them loans. Her examples ignore historical context entirely. For example, Ms. Hertz cites US/UK bank refusal to lend to single women in the 1960’s. But women were worse credit risks in the 1960’s, due primarily to the active discrimination against them in the workplace and in schools. The lack of maternal-leave and sexual discrimination laws hampered women’s ability to achieve sustainable employment that fairly compensated them for their skills. This societal discrimination impaired women’s creditworthiness by limiting their capacity to repay a loan. (What would Ms. Hertz say to the hypothetical Saudi banker that refuses a woman a business loan, due to the fact that she is not allowed to drive herself to work every day? Is the credit officer supposed to ignore the barriers that Saudi laws and society have imposed upon her? While unfair to women, it is difficult to blame the banker for not making the loan)

Without a doubt, sex discrimination is unfair and has impeded the progress of many capable women. However, it is equally unfair to blame the bank lender for the fault of wider societal bias. Banks are supposed to be in the business of making loans that will be repaid, not social engineering to fix broader societal bias (look no further than subprime CRA lending in the US, it hasn’t worked out so well for us). If Ms. Hertz really wants bank lenders to open their checkbook, she would do better to plead the case of how profitable/safe such lending can be, rather than demanding fairness (which only comes from broader political and social changes).

Summary- While people generally want a society that is fair and provides ample opportunity to succeed, but fairness will never come by expecting other human beings to act against their best interest. The good intentions of such socialistic ideas create a conflict, as lenders are forced to fund marginal-ideas that crowd out more innovative and interesting business ideas. As a result, the playing field is skewed towards whichever special-interest group has the ear of the country's leader, rather than who has the best idea.


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