Referencing a piece by Amar Bhide, Robert E writes:
The paper discusses specifically how we've moved away from decentralized home loan lending: "Home buyers would apply for loans from their local bank, with which they often had an existing relationship. A banker would review each application and make a judgment, taking into account what the banker knew about the applicant, the applicant’s employer, the property, and conditions in the local market. The banker would certainly consider history—what had happened to housing prices, and the track record of the borrower and other similarly situated individuals."
... towards a more centralized system: "The brokers’ role in the credit process is mainly to help applicants fill out forms. In fact, hardly anyone now makes case-by-case mortgage credit judgments. Mortgages are granted or denied (and new mortgage products like option ARMs are designed) using complex models that are conjured up by a small number of faraway rocket scientists and take little heed of the specific facts on the ground."
And the author argues that this centralization is in conflict with Hayek's thesis (It was the Hayek shout-out that kept me reading the piece):
"The great twentieth-century thinker Friedrich Hayek made the classic argument for decentralized choice in his essay “The Use of Knowledge in Society.” The stability of the economy depends on constant adjustments to small changes, he believed—“B stepping in at once when A fails to deliver.” No single individual has the knowledge to make those adjustments; rather, it is widely dispersed across many individuals. But information about “the circumstances of the fleeting moment” cannot be quickly and accurately communicated to a central planner. Therefore, individuals who have on-the-spot knowledge must be allowed to figure out what to do."
Anyway this idea of a non-coercive or autocratic centralization was a little new to me (I hear mostly of centralization by the state, or perhaps by the firm to lower transaction costs) and I wondered if there is merit to it. After all, the decision of Finance to resort to more models with simplifying assumptions at the expense of - perhaps costlier in the short run? - case-by-case and on-the-ground assessments by lenders was completely voluntary as far as I can tell.
Interesting. I had not seen that paper. Please discuss.