Economics and Finance

African-Americans and Financial Crises, Part II

The world seems to be going nuts and we could analyze it endlessly here, but instead, let’s pause–and continue the conversation on African-Americans, because we can’t simply focus on some of America’s problems and ignore the others.

Let me continue with another story. In another class in D.C., this one an adult night class, I was tasked with an overview of economics. When I explained the cause of the Great Depression to an adult class, one student said, Wasn’t it the gap between rich and poor, specifically black Americans?

As we saw in the first post and we’ll see here, the black experience of financial crises is different. The financial system reinforces racism, and financial crises disproportionately hurt African-Americans.

Pre-Great Depression

Closing out the 19th century, the Depression of 1893 was one of the worst economic depressions of the time. Starting in Argentina with wheat crop failure and a coup, it caused prices of commodities, on which U.S. economic growth was highly reliant, to crash. A panic in Europe led to bank runs in the U.S., and a crippling credit crunch. The crisis probably made bad things worse, as during this time African-Americans faced a general lack of economic opportunity and violence–particularly when they attempted to organize. And the political consequences, including the 1894 sweeping Republican victory in Congress and the 1896 election of William McKinley, did little to change the status quo for blacks. And so Jim Crow consolidated.

After the Panic of 1907, national debate centered on how to mitigate the risk of and the damage from these crises. The Federal Reserve was established in Christmas 1913, ending America’s long spell without a central bank (the Second Bank was privatized in 1836). Around this time, the KKK experienced a resurgence and blacks left the South in the Great Migration, seeing economic opportunities in the North. The North was in the middle of a booming economy, but blacks found themselves segregated–including in places like Harlem, which produced the Harlem Renaissance of the 1920s.

 

The End to a Party That Never Was 

There are a number of explanations behind the Great Depression; the mainstream version is that a fall in aggregate demand (consumer spending) in the late 1920s combined with a contraction in the money supply (the Fed raised rates too quickly) led to a severe contraction in the economy.

That’s not what I heard in an adult class I taught one weekday evening in D.C. Wasn’t it the gap between rich and poor, specifically black Americans? The premise of that thought is flawed, but some economists pointed out that inequality played a role:

the economy produced more goods than consumers could purchase, because the consumers did not have enough income. According to this view, in the 1920s wages had increased at a lower rate than productivity growth, which had been high. Most of the benefit of the increased productivity went into profits, which went into the stock market bubble rather than into consumer purchases. Thus workers did not have enough income to absorb the large amount of capacity that had been added.

I don’t think this explanation is fundamentally different from the aggregate demand story. But anyway, African-Americans were suffering before the stock market even crashed. Hundreds of thousands were leaving the South as lack of economic opportunity and violence continued.

After the onset of the Depression, unemployment was over 30% for whites, but well over 50% for blacks. Traditional “negro jobs” (e.g. busboys, maids, cooks, etc.) were now sought out by unemployed whites, whose attitude is best summarized by the saying “No jobs for n*****s until every white man has a job.” In effect, the Depression had served to exacerbate already existing racial tensions, to reveal the true nature of America’s racial oppression.

Misery for African-Americans didn’t go without a response from the community. For one, they changed party politics forever: though they had voted Republican since Lincoln freed the slaves, they overwhelmingly went for Roosevelt in 1936. The fact was that Republican policies offered them little, while New Deal programs such as the Works Progress Administration (WPA) actually helped their community, including “a first real opportunity for employment in white-collar occupations” as well as aid for African-American artists and writers, housing, migrant workers, and transcription of slave oral histories. At the same time, Roosevelt sidestepped the issue of segregation in the South.

 

And to Make Things Worse…

The New Deal had a dark side. Let’s talk about redlining. In 1934, Congress passed the National Housing Act, which established the Federal Housing Administration (FHA). The FHA established mortgage underwriting standards based on the criteria determined by the Federal Home Loan Bank Board and the Home Owner’s Loan Corporation–these criteria were based on pre-existing segregation, but once mortgages were approved or denied based on these criteria, segregation was reinforced and urban decay began. The way it worked:

On the maps, the newest areas—those considered desirable for lending purposes—were outlined in green and known as “Type A”. These were typically affluent suburbs on the outskirts of cities. “Type B” neighborhoods, outlined in blue, were considered “Still Desirable”, whereas older “Type C” were labeled “Declining” and outlined in yellow. “Type D” neighborhoods were outlined in red and were considered the most risky for mortgage support. These neighborhoods tended to be the older districts in the center of cities; often they were also black neighborhoods.

As a result, African-Americans had limited access to banking services, along with a host of others (healthcare, retail merchandise, even groceries). It’s difficult to understate the consequences:

Redlining paralyzed the housing market, lowered property values in certain areas and encouraged landlord abandonment. As abandonment increased, the population density became lower. Abandoned buildings served as havens for drug dealing and other illegal activity, increasing social problems and reluctance of people to invest in these areas.

As I’ve mentioned before, racism was written into the manuals:

Thompson traces the origins of Fannie Mae, Freddie Mac, and Ginnie Mae and in so doing, highlights that in the early decades, from around the ’30s to the ’60s, the agencies created racist policies that discriminated against black and other minority mortgage borrowers, even denying them flat-out. It was clear that the agencies had originally been created for aiding white homeowners. One of the agencies’ manuals focused on “social harmony,” aiming to keep blacks out of white neighborhoods.

Add this to the fall of the Freedman’s Bank and the premature end to Reconstruction on the list of financial tragedies in African-American history. With their access to mortgage credit restricted, blacks were unable to benefit as fully as whites in the postwar boom.

capture
Source: Joint Center for Political and Economic Studies

 

After the War

In addition to the availability of housing in postwar America, there was the availability of work. Let’s use black unemployment history as a guide:

The black-white gap is persistent, for undetermined structural reasons. What is striking to me is that black unemployment peaked in 1983, and even the gap with white unemployment does, too. This is during the recession started by the “Volcker shock.” America was experiencing enormous inflation, and in response the Fed hiked overnight interest rates to as much as 20%, forcing a recession. Indeed, the gap appears to grow during every recession (late 1950s, early 1980s, and the most recent crisis).

“No jobs for n*****s until every white man has a job.”

There are a couple reasons I can think of for this phenomenon. The first is unsurprising: in times of weak labor demand, employers’ biases against black workers gets worse. The other, probably the dominant force at play, is that a fall in the demand for unskilled labor, because more blacks fall into this category, increased black unemployment.

 

Anti-Redlining

In 1977, in response to the urban decay as a result of redlining, Congress and President Carter passed the Community Reinvestment Act, which encourages financial institutions to expand credit in communities in which it is needed. The effects of the Act, which has been revised a mind-boggling number of times, are hotly debated.

On the pros side, Ben Bernanke, though he has problems with the Act, says it might have gotten “banks to enter under-served markets that they might otherwise have ignored.” A number of studies have found that CRA boosted lending to low- and moderate-income households as intended.

Critics point to a number of problems with its effectiveness, including:

  • low-income areas still lagged in access to commercial loans;
  • most loans went to high income areas;
  • vague instructions to banks are just more likely to push them out of neighborhoods, which would be better served by direct federal development projects.

The debate only gets more intense when we bring in causes of the 2008 financial crisis. The argument put forth is that CRA loosened lending standards, which contributed in a significant way to the subprime lending boom. The record shows that Congress, Democrats especially, pushed particularly hard for expanded lending, and dismissed the risks when brought up. The Financial Crisis Inquiry Commission said in its report that was not the case, which was echoed by a number of government officials. CRA loans, according to this side, might have even been safer than other loans on average.

But if the criticism is correct, then this should impact how we deal with African-Americans’ financial repression. That is, by trying to aggressively alleviate the harm done by redlining, we made things worse by causing the financial crisis, which of course made black unemployment worse and destroyed black wealth.

By 2031, white household wealth will be 31 percent below what it would’ve been had the recession never happened, according to the report. For black households, wealth will be 40 percent lower, which will leave black families about $98,000 poorer than if the recession hadn’t taken place.

But that’s if we believe this critique–we don’t know if subprime lending would’ve happened regardless of our attempts to expand credit for minorities. Not to mention that lovely human being Steve Bannon also buys the argument.

The two things we do know are that we are still dealing with the consequences of redlining, and that banks don’t like these regulations. Just last week, Wells Fargo was reported to get a regulatory downgrade because of its performance related to CRA, which means it’ll be harder to do M&As, open new branches, etc.

 

An Unequal Finance

Yes, finance continues to be an unequal space for African-Americans (and that’s not even getting to black employment in the financial sector). Why that is so and how to respond are crucial questions going forward.

Figure 1. Market shares of owner-occupied home purchase loans. See accessible link for data description.
Market share of home purchase loans.

A recent Fed paper finds:

most of the decline in black and Hispanic market shares have come from borrowers with low credit scores (less than 620). Within the white population, low-score lending has also declined sharply, but, historically, a much smaller fraction of white borrowers have low credit scores compared with black and Hispanic borrowers. Tighter credit conditions since 2006 has therefore had a disproportionate effect on minorities’ credit access.

Basically, it has become harder to lend to risky borrowers, which was the intention after the crisis. This says less that lenders intentionally avoid blacks and Hispanics and more that minorities are poorer. But if homes are an important way to build wealth, then this phenomenon feeds on itself. And if we’re still living with the legacy of the Freedman’s Bank, redlining, and a number of negative shocks to black wealth and employment, then that phenomenon becomes hard–impossible–to stop.

Moreover, policy has created neighborhoods such as Ferguson in which we’ve seen so much unrest in the last couple of years. Given what we’ve seen just in the financial sector, it’s easy to see why.

So, what have we learned?

  • Financial crises from 1837 to 2008 have had a large, discernible impact on African-Americans, on the whole negative in their impacts on savings, homeownership, and employment.
  • Finance doesn’t create racism, but it has reinforced it, by strengthening and profiting from slavery, rejecting colorblindness in access to credit, and, when it is colorblind, exacerbating economic disparities.
  • Economic racism involves prioritizing white economic prosperity over others.
  • The first way to help African-Americans is the same way to help all Americans, by preventing devastating financial crises.
  • African-Americans are systemically repressed by the financial system, intentional or not.
  • Finance is just one sphere, and racism does not originate in it. Arguably, education, civil rights protection, and other means should be prioritized to eliminate black oppression.
  • We’ve made some progress in correcting financial disparities, but as with inequalities in other spheres, there is much, much work to do.

And since it’s almost Christmas, I’ll leave off with this line from “O Holy Night”:

Chains shall He break for the slave is our brother;
And in His name all oppression shall cease.

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