13 March 2012

"The Predatory Lending Fallacy"

EconLog | Arnold Kling | The Predatory Lending Fallacy

Consider the following problems:

1. Qualified borrowers getting bad deals.
2. Unqualified borrowers getting good deals.

(1) is predatory lending. (2) is what caused the housing bubble and crash. Getting that story straight would be a major accomplishment for the media.
I learned this lesson about dual error types in loans on literally the 2nd day of my undergrad Data Mining/Machine Learning class offered by the Computer Science department. This isn't advanced finance. It's simple enough to make a good 5 minute lecture example for people who know nothing about banking.

Not to get all blustery, but it utterly baffles me that there exist adults in the business/finance/policy sphere that don't grok this. Or is the problem that they don't want to grok it?

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