Very interesting article. Because securitization is the auto industry’s financial backbone, is this discrimination being carried over into those securities? Are lenders mislabeling non-white borrowers as higher risk so they can offload the note for a higher return and double dip on the markup?
It’s always seemed incredibly perverse to me that auto dealers offer financial products. About as backwards as banks offering cars for sale. Easiest solution IMO is to separate the two and prohibit auto dealers from offering loans (all financing must be third party) but I know this is a pipe dream (see note about loans being more profitable than cars).
More.... "finance managers" mark up as much as they think they can get away with. They'll offer usurious rates and when someone screams offer lower. I don't see how one could legislate against price negotiations.
Sales of new cars seems to be non negotiable in my last three experiences, a price was agreed online. Do people even bargain over new cars anymore?
I wonder what the stats are for Asians. Asians have a reputation for being "difficult" ie hard bargainers, South Asians are as likely to end up owning the dealership, before leaving, it's like money negotiating is a national sport or something.
I sold cars when I first came down out of the mountains and had running water and stuff. It was before I had a bank account, very educational.
Dealers mark up auto loans as much as they think they can get away with. Always have. People think that when the salesman completes all his paperwork and sends the buyer in to finance, that everything is over. It's not. Many dealerships make more profit on the loan than they do the sale of the car. If Black people are paying more for loans it's because they aren't as canny.
As the footnote explains, in the first study race is from drivers licenses and birth certificates matched to loan records. In the second it’s a statistical match on names by race. The second study examined the correlation (statistical discrimination) case and dies not find evidence of it. The first study also had done evidence like that too.
There's a substantial segment of the population called "consumers" that economists always refer to when discussing the effects of raising interest rates, etc. For example, Claudia describes a discussion about how high interest rates must go before the unnamed consumers start to "buckle." To economists, "consumers" seem to be in the same category as laboratory rats experimented on by scientists. Be assured that none of the economists having this discussion are in in this category. Somehow, this dynamic doesn't seem right to me.
Okay, I'll explain my analogy further, although this is more of a rant than an explanation. (LOL) Full disclosure: I’m a statistician, not an economist, so, although I know about research methods and the uncertainty in statistical models, often cited by Larry Summers to give him an excuse for being wrong, I don’t know much about inflation. I know that there are many economists (like Claudia) who do not support the Fed’s aggressive rate hikes. My rant is mainly directed at Jerome Powell, Larry Summers (whom I realize is not on the Fed, but who is listened to by people like Powell), and their followers.
When a researcher does a study involving humans, there are stringent conditions, called “human subjects” criteria, that must be met. The Federal Office of Health and Human Services (HHS) has a division called the Office for Human Research Protection (OHRP) devoted to this. Other branches of HHS are National Institutes of Health (NIH), which oversees government health research and the Food and Drug Administration (FDA), which tries to ensure that food and drugs are safe for public use. Researchers in this country, whether academic or corporate, cannot use human subjects without permissions and safeguards. No such safeguards are in place for the Fed, who, for example, can pursue aggressive interest rate hikes, not knowing for sure how they will ultimately affect inflation and, more importantly, how they will affect the millions of Americans who must deal with the results. Two of the biggest proponents of aggressive rate hikes are Fed Chair, Jerome Powell, and Lawrence Summers, the Harvard economist who was formerly Obama’s Treasury Secretary. (Powell, it should be noted, is not an economist but an investment banker, a wolf in economist’s clothing.) What have they said lately?
In a speech at the London School of Economics in June 2022, Summers said, according to a Bloomberg article, “We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” At the time of Summers’ comments, the unemployment rate was 3.6%, so Summers was openly advocating that millions of Americans be fired from their jobs. He has made many similar comments since then. Following in Summers’ footsteps, Fed Chair Jerome Powell said after a meeting of the Fed in Jackson Hole on August 26,“While rate increases would bring down inflation, they will also bring some pain to households and businesses.” He added, “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Powell and Summers glibly advocate policies that will cause pain, not to themselves, but to millions of other Americans, and there is no guarantee that their policies will help the pain sufferers in the long run. There are no human subjects rules to make the Fed adhere to any guidelines. There are no guardrails to rein in the Fed if its policies are wrong. Rather than dealing with human subjects, the Fed’s freedom to experiment as they wish can be compared with medical researchers experimenting with laboratory rats, or even (maybe I’m being too harsh) to the infamous Tuskegee Syphilis study conducted by the U.S. Public Health Service beginning in 1932, in which uninformed black men were injected with syphilis and given no recourse when various cures were found (It’s the Tuskegee study that inspired modern human subjects controls). It’s no coincidence that those who suffer most from aggressive interest rate hikes are people of color and others who can’t afford to fight back. Actually, thanks to PETA and other less-militant groups, laboratory rats currently have more protection for participating in experiments than working class Americans do from Fed policies.
In an interview with Fortune magazine on September 23, 2022, Summers said, “Most of us have learned that [when] the doctor prescribes you a course of antibiotics and you stop taking the course when you feel better rather than when the course prescribed is over, your condition is likely to reoccur. And it’s likely to be more difficult to eradicate the next time because the bacteria have become more resistant.” Summers has used this doctor-patient analogy repeatedly in speeches and interviews over the years. In these analogies, Summers, of course, is the doctor and consumers (excluding economists and other well-to-do citizens) are the patients.
When doctors prescribe a course of antibiotics, the duration of the antibiotic, and even the antibiotic itself, have been obtained by years of clinical trials, in which, you guessed it, human subjects protections were in place. How fortunate for Summers that he doesn’t have to worry about this when he gives consumers their medicine and forces them to take it when the “bacteria” don’t go away. And when is the course of medicine over? With antibiotics, it’s always clear, usually a week or two. Raising interest rates has no fixed end date. It will presumably end when certain abstract goals are reached, regardless of how much pain the patients are suffering. In fact, aggressive interest rate hikes will most likely end before the abstract inflation goal is reached, when suffering Americans will have risen up and said, “Enough!”
Powell has recently said that since all the other markers of inflation are doing well, his marker of inflation is unemployment. If there's healthy employment, that's bad. Think about that. The interest rate in January 2023, was 3.4%, lower than June 2022, when Summers gave his speech to LSE advocating higher unemployment. This seems to indicate that the Fed’s strategy of aggressively raising interest rates to increase unemployment will continue unabated until enough people are thrown out of work to bring whatever measure of inflation they are currently using down to some arbitrary level.
As everyone knows, raising interest rates doesn't selectively raise unemployment rates. Just as chemotherapy doesn’t only kill cancer cells, raising interest rates also kills the housing market for middle class Americans as well as making it harder to borrow money for just about anything. Given our economic recovery from the pandemic and the problems with Ukraine, it seems crazy that the Fed would keep raising interest rates, knowing full well how many vulnerable people will be hurt. In the world of zero sum games, when one person suffers, another thrives. I wonder how Powell's friends in the banking community, along with others, such as short sellers, and wealthy folks who have money stashed in CD's, bonds, and high interest rate savings accounts are doing these days.
To repeat, Who will be suffering from all this pain? Many Americans who were planning to buy a house or a car won’t be able to do so because of high, arbitrarily imposed interest rates. For what reason? To take their medicine for the full course, as prescribed by Dr. Summers and his medical assistant, Mr. Powell, neither of whom knows what the full course is, and neither of whom has to worry about the constraints of experimenting with human subjects.
As Dan Ferris, who publishes a financial newsletter, puts it,
“In plain terms, the Fed is trying to hurt Americans financially by putting them out of work, making their housing more expensive and their credit-card debt too burdensome. It alleges that the overall outcome will be better for everyone if it can do that because the inflation it's fighting is worse than the recession it's trying to cause. It's a typical, modern, political-style argument...
I'm going to make your life worse by stealing more from you or hurting you more in some other way. But it's ultimately for your own good!"
The discrimination is self-reinforcing when higher interest rates lead to a higher rate of default.
A bad problem in the shadows. Some sunlight always has a good effect.
Not able to read article on Bloomberg. Just in case copying this from Jon Lanning https://www.chicagofed.org/publications/profitwise-news-and-views/2023/discrimination-auto-loan-market
Very interesting article. Because securitization is the auto industry’s financial backbone, is this discrimination being carried over into those securities? Are lenders mislabeling non-white borrowers as higher risk so they can offload the note for a higher return and double dip on the markup?
It’s always seemed incredibly perverse to me that auto dealers offer financial products. About as backwards as banks offering cars for sale. Easiest solution IMO is to separate the two and prohibit auto dealers from offering loans (all financing must be third party) but I know this is a pipe dream (see note about loans being more profitable than cars).
More.... "finance managers" mark up as much as they think they can get away with. They'll offer usurious rates and when someone screams offer lower. I don't see how one could legislate against price negotiations.
Sales of new cars seems to be non negotiable in my last three experiences, a price was agreed online. Do people even bargain over new cars anymore?
I wonder what the stats are for Asians. Asians have a reputation for being "difficult" ie hard bargainers, South Asians are as likely to end up owning the dealership, before leaving, it's like money negotiating is a national sport or something.
I sold cars when I first came down out of the mountains and had running water and stuff. It was before I had a bank account, very educational.
Dealers mark up auto loans as much as they think they can get away with. Always have. People think that when the salesman completes all his paperwork and sends the buyer in to finance, that everything is over. It's not. Many dealerships make more profit on the loan than they do the sale of the car. If Black people are paying more for loans it's because they aren't as canny.
see addendum above on your comment. https://stayathomemacro.substack.com/p/hidden-costs-in-auto-loans-and-discrimination
How was borrower race identified? How was it determined that race was a contributing factor in loan rates given that correlation is not causation.
As the footnote explains, in the first study race is from drivers licenses and birth certificates matched to loan records. In the second it’s a statistical match on names by race. The second study examined the correlation (statistical discrimination) case and dies not find evidence of it. The first study also had done evidence like that too.
There's a substantial segment of the population called "consumers" that economists always refer to when discussing the effects of raising interest rates, etc. For example, Claudia describes a discussion about how high interest rates must go before the unnamed consumers start to "buckle." To economists, "consumers" seem to be in the same category as laboratory rats experimented on by scientists. Be assured that none of the economists having this discussion are in in this category. Somehow, this dynamic doesn't seem right to me.
Could you explain more?
Okay, I'll explain my analogy further, although this is more of a rant than an explanation. (LOL) Full disclosure: I’m a statistician, not an economist, so, although I know about research methods and the uncertainty in statistical models, often cited by Larry Summers to give him an excuse for being wrong, I don’t know much about inflation. I know that there are many economists (like Claudia) who do not support the Fed’s aggressive rate hikes. My rant is mainly directed at Jerome Powell, Larry Summers (whom I realize is not on the Fed, but who is listened to by people like Powell), and their followers.
When a researcher does a study involving humans, there are stringent conditions, called “human subjects” criteria, that must be met. The Federal Office of Health and Human Services (HHS) has a division called the Office for Human Research Protection (OHRP) devoted to this. Other branches of HHS are National Institutes of Health (NIH), which oversees government health research and the Food and Drug Administration (FDA), which tries to ensure that food and drugs are safe for public use. Researchers in this country, whether academic or corporate, cannot use human subjects without permissions and safeguards. No such safeguards are in place for the Fed, who, for example, can pursue aggressive interest rate hikes, not knowing for sure how they will ultimately affect inflation and, more importantly, how they will affect the millions of Americans who must deal with the results. Two of the biggest proponents of aggressive rate hikes are Fed Chair, Jerome Powell, and Lawrence Summers, the Harvard economist who was formerly Obama’s Treasury Secretary. (Powell, it should be noted, is not an economist but an investment banker, a wolf in economist’s clothing.) What have they said lately?
In a speech at the London School of Economics in June 2022, Summers said, according to a Bloomberg article, “We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” At the time of Summers’ comments, the unemployment rate was 3.6%, so Summers was openly advocating that millions of Americans be fired from their jobs. He has made many similar comments since then. Following in Summers’ footsteps, Fed Chair Jerome Powell said after a meeting of the Fed in Jackson Hole on August 26,“While rate increases would bring down inflation, they will also bring some pain to households and businesses.” He added, “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Powell and Summers glibly advocate policies that will cause pain, not to themselves, but to millions of other Americans, and there is no guarantee that their policies will help the pain sufferers in the long run. There are no human subjects rules to make the Fed adhere to any guidelines. There are no guardrails to rein in the Fed if its policies are wrong. Rather than dealing with human subjects, the Fed’s freedom to experiment as they wish can be compared with medical researchers experimenting with laboratory rats, or even (maybe I’m being too harsh) to the infamous Tuskegee Syphilis study conducted by the U.S. Public Health Service beginning in 1932, in which uninformed black men were injected with syphilis and given no recourse when various cures were found (It’s the Tuskegee study that inspired modern human subjects controls). It’s no coincidence that those who suffer most from aggressive interest rate hikes are people of color and others who can’t afford to fight back. Actually, thanks to PETA and other less-militant groups, laboratory rats currently have more protection for participating in experiments than working class Americans do from Fed policies.
In an interview with Fortune magazine on September 23, 2022, Summers said, “Most of us have learned that [when] the doctor prescribes you a course of antibiotics and you stop taking the course when you feel better rather than when the course prescribed is over, your condition is likely to reoccur. And it’s likely to be more difficult to eradicate the next time because the bacteria have become more resistant.” Summers has used this doctor-patient analogy repeatedly in speeches and interviews over the years. In these analogies, Summers, of course, is the doctor and consumers (excluding economists and other well-to-do citizens) are the patients.
When doctors prescribe a course of antibiotics, the duration of the antibiotic, and even the antibiotic itself, have been obtained by years of clinical trials, in which, you guessed it, human subjects protections were in place. How fortunate for Summers that he doesn’t have to worry about this when he gives consumers their medicine and forces them to take it when the “bacteria” don’t go away. And when is the course of medicine over? With antibiotics, it’s always clear, usually a week or two. Raising interest rates has no fixed end date. It will presumably end when certain abstract goals are reached, regardless of how much pain the patients are suffering. In fact, aggressive interest rate hikes will most likely end before the abstract inflation goal is reached, when suffering Americans will have risen up and said, “Enough!”
Powell has recently said that since all the other markers of inflation are doing well, his marker of inflation is unemployment. If there's healthy employment, that's bad. Think about that. The interest rate in January 2023, was 3.4%, lower than June 2022, when Summers gave his speech to LSE advocating higher unemployment. This seems to indicate that the Fed’s strategy of aggressively raising interest rates to increase unemployment will continue unabated until enough people are thrown out of work to bring whatever measure of inflation they are currently using down to some arbitrary level.
As everyone knows, raising interest rates doesn't selectively raise unemployment rates. Just as chemotherapy doesn’t only kill cancer cells, raising interest rates also kills the housing market for middle class Americans as well as making it harder to borrow money for just about anything. Given our economic recovery from the pandemic and the problems with Ukraine, it seems crazy that the Fed would keep raising interest rates, knowing full well how many vulnerable people will be hurt. In the world of zero sum games, when one person suffers, another thrives. I wonder how Powell's friends in the banking community, along with others, such as short sellers, and wealthy folks who have money stashed in CD's, bonds, and high interest rate savings accounts are doing these days.
To repeat, Who will be suffering from all this pain? Many Americans who were planning to buy a house or a car won’t be able to do so because of high, arbitrarily imposed interest rates. For what reason? To take their medicine for the full course, as prescribed by Dr. Summers and his medical assistant, Mr. Powell, neither of whom knows what the full course is, and neither of whom has to worry about the constraints of experimenting with human subjects.
As Dan Ferris, who publishes a financial newsletter, puts it,
“In plain terms, the Fed is trying to hurt Americans financially by putting them out of work, making their housing more expensive and their credit-card debt too burdensome. It alleges that the overall outcome will be better for everyone if it can do that because the inflation it's fighting is worse than the recession it's trying to cause. It's a typical, modern, political-style argument...
I'm going to make your life worse by stealing more from you or hurting you more in some other way. But it's ultimately for your own good!"
It's never for your own good...”