by Andrew Chalk
In November WFAA aired a 9 minute story on redlining in Dallas (it may be viewed in full below).
The report contended that residents of South Dallas cannot get loans because 20% of banks in Dallas County ‘redline’ along I-30. It cited a random selection of small Dallas banks (too small to advertise on WFAA or ABC, the way that Chase or another major bank might) that it saw as culprits.
Unfortunately, WFAA’s analysis doesn’t prove that anyone failed to get a loan because of redlining, or that anyone paid any more because of the practice.
Let’s analyze this by assuming, for the sake of argument, that there is just one bank in Dallas. Let’s call it KKK bank (in fact, there is a picture of the Board of Directors below). KKK bank redlines. Nobody south of I-30 gets a loan from them. WFAA’s analysis stops here, thinking that it describes the end-state.
Nothing could be further from the truth. When KKK bank redlines it gives up profit it could otherwise make from profitable loans. That creates a profit opportunity to lend to people in South Dallas who want to borrow. African-American entrepreneurs, or non-African American entrepreneurs motivated by profit, can start a bank to lend to South Dallas businesses and make profits, potentially very large ones, as the only lender. If they succeed in making a profit, they have a problem in that their very success will incentivize other entrepreneurs to start banks in South Dallas. These new entrants will force down lending rates until banks find profits on the loans cover the risks of making them. Just as they do north if I-30, or in any other competitive market.
If WFAA thinks that racism is raising lending rates in South Dallas then it would be better advised to look for evidence of differential interest rates for otherwise similar black versus white borrowers in South Dallas, or at the profitability of South Dallas banks versus banks elsewhere, or barriers to entry to lending in South Dallas. There are other approaches to examining racism or other prejudices in lending as well, the important point is that redlining does not explain interest rates or the volume of loans, even when practiced by characters as unsavory as the Board of KKK bank.
This story also raises an issue about investigative reporting. The report shows the importance, when attempting to provide analysis, rather than news, of a situation of engaging a domain expert to confirm the soundness of the analysis before going live.
The WFAA report is such a pristine example of economic error that I urge school and college teachers of economics 101 to use it to teach classes about how markets work and how they benefit people (in this case the citizens of South Dallas).