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  November 6, 2017

The Color of Money: Black Banks and the Racial Wealth Gap (2/3)

Mehrsa Baradaran details how government policy created white middle class wealth while simultaneously impoverishing African Americans
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Mehrsa Baradaran is a professor of law at the University of Georgia school of law and author of The Color of Money and How the Other Half Banks (both published by Harvard University Press).


JAISAL NOOR: And in your book, you note that many other immigrant groups had their banks, and they were integrated into American society. They were able to build wealth. You talk about how Bank of America, one of the biggest banks today, was originally the Bank of Italy. You know, Italians and other groups were able to kind of overcome the demonization that happened to every immigrant group when they came to America, and they became white and were able to build that prosperity. Why was this not available to African-Americans?

MEHRSA BARADARAN: Because African-Americans were never deemed white. Whiteness went in sync with economic power, and so insofar as you could be white, which is what the Irish and the Italians could do and the Germans and the Jews, after the new deal, got invited to be white. You know? And they got to take advantage of FHA mortgage loans and the GI bill. Those were huge bonanzas of credit and subsidies that went to create the American middle class, and they were strictly given out on racial lines.

By then, Italians and Irish were white, and they used their position of whiteness even to block Blacks from collective action power. Irish and Italians that were involved in the industry north and the unions were able to work their way into the union ranks and to make sure the Blacks were never involved in the unions. So Blacks lost their ability to even join forces in collective power.

The houses, once white happens, and through these FHA redline maps, Italians and Irish and their banks are able to integrate into the American economy where Blacks are left behind, purposefully so. I mean, the entire new deal package was a compromise with white supremacy. FDR cannot pass his New Deal, sort of democratic socialist reforms, without the southern Black in the Senate, and the southern Black in the Senate is not about to let Blacks become property owners, and economically autonomous. They needed them to stay as the labor force in the south, so they forced the new deal to have huge loopholes that exempt blacks from any protections.

JAISAL NOOR: What you're talking about here is really one of the greatest stories that haven't been told about the 20th century in America, the story of how the white middle class was created. It was through these FHA loans that allowed and public housing, which was available largely to white Americans. It allowed working class whites to build wealth, to get subsidized housing when there was a huge housing shortage during the Great Depression and World War II, get stable housing and then move to the suburbs, which today remain largely white and segregated. While, as you've noted, as white wealth was created, Black poverty and segregation was also created, specifically through government policy. As you note, Black banks were doomed to fail because they didn't have access to the same capital that white America had. Can you talk a little bit about that as well?

MEHRSA BARADARAN: Yeah. I mean, to the extent that any American today is able to get, middle class America. I'm leaving out billionaires here and very, very poor and the bottom, but the large, even the middle, the American middle class is created through these New Deal programs. And these new deal programs were explicitly racial. So white people who were factory workers, blue collar, became middle class because they were able to own homes and go to colleges funded by federal programs. These programs were not available to Blacks explicitly. So, what that means is that your grandfather was able to get an FHA mortgage, and that creates intergenerational wealth. And because your grandfather got that FHA mortgage, your grandmother, usually the father, and then your father was able to benefit from that, which means increased access to colleges, better schools because the way our taxes work is the homeowner taxes go into the schools. So, it's this whole cycle of privilege that starts with these New Deal programs that by the way, last well into the 1960s. Their effects are very much with us today.

So the story of the 20th century is, you know, W.E.B DuBois says this in the '30s, but he's much more, I think, prescient than he realized but it's a story of the color line. And the color line is drawn by federal policy, and it's through the FHA maps, the HOLC creates them in 1934. The FHA follows them and the maps are that we're going to redline areas like Baltimore, like the inner city Detroit, like Harlem, like south Chicago. No mortgages are given in these areas, and the one indicator that trumps all other indicators is the race of the neighborhood. If the neighborhood has mixed race, which meant Blacks, they could not get mortgages. They were deemed to be highly risky, and so no banks would lend.

Even outside of the FHA programs, banks were using these maps. So, mortgages were not able to be given in the ghetto, and then outside of the ghetto, and I'm using the word ghetto purposefully here, because these were not Black communities that were self-selected into these areas. These were forced segregated communities. Outside of those areas, Blacks could not borrow or get loans there either because of the racial covenants. The racial covenants are put in by white homeowners associations because they know that once blacks move into their neighborhoods, their property values decline as well. So it's very much an economic decision fueled by racism.

What this means for Black banks and for Black individuals in families and communities is that they cannot accrue wealth because wealth is fueled by mortgages. But for those who can get mortgages, that wealth is able to sort of spiral into more wealth. Once you have a home mortgage, you're able to get a credit card, you pay less for everything. Meanwhile in the ghetto, if you're renting, credit card issuers won't come into the ghetto, so you're paying installment credit for your TV, your hospital bills, your doctor. What installment credit does is it deprives communities of the little wealth that they have. Installment credit is very expensive. It's onerous, so you know, you've got repo men and cops, everything just to buy a TV. And outside in the suburbs, it's a completely different credit market that develops based on these new deal programs.

So, this is the divergence that I track that still remains with us today. This is why you see in lower income Black communities, more payday lenders. More check cashers. These are the areas where banks leave because they operate by different credit markets. What we've done is we've pooled the credit risk that should be borne by all and diversified, is just borne in the ghetto. Those areas where the redline is put around them and largely Black population within, pay more for everything. For housing, for credit, for all of it. And then outside, it's credit that's subsidized by the federal government, and it's essentially very risk-free.

JAISAL NOOR: So, we know these redlining maps and extensions of that were government policy. But banks themselves are really an extension of the government. Can you talk about that as well, because that's something that's not commonly understood or discussed.

MEHRSA BARADARAN: Yeah. Banks are, this is my area, and this is why I came to Black banking. The first book goes into this in detail but banks and governments are very much partners. Look at what happens in 2008. The banks fail. Usually when businesses fail, they go bankrupts. But banks, because of the way that banks operate, we can't let them go bankrupt. Why? Because they use other people's money. They use our deposits and our investments to make money, and because they're linked to the federal government through this monetary policy angle.

Banks essentially, Louis Brandeis says in 1934, they look like public utilities. Right? They're not private entities. Look at where the credit is coming from. Their supply of credit comes through federal reserve policy decisions. The federal reserve is a government agency. That money is the monetary supply that is fueled by the federal government. All of the credit infrastructure on which banks rely to lend is federal policy. The loans, FHA loan guarantees, FDIC insurance is the way that keeps all of our deposits in these banks, and a whole bunch of other federal programs that shore up the banking industry. I don't even call it a federal subsidy. It's like calling the wheels to your car a bonus feature. Banks and governments need each other to operate. So, banks are very much public entities.


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