Money as a Democratic Medium |  The Color of Money: Banking and Racial Inequality (with Slides)
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Money as a Democratic Medium | The Color of Money: Banking and Racial Inequality (with Slides)

September 1, 2019

to go ahead and start. I think we’ll have a
few people trickling in, chomping on their potato chips. But I do want to take a
few minutes to introduce Mehrsa Baradahan–
because she’s worth it. Mehrsa is the Robert
Cotten Alston Associate Chair in Corporate Law at
the University of Georgia. She currently also serves as
the school’s Associate Dean for Strategic Initiatives. But I want to talk
about her banking stuff. I got to know Mehrsa
through her work. I read the How the Other
Half Banks, and I thought, this has got to be a part
of any conversation– this is central to
any conversation about monetary design
and the problems that it’s meant to cure. It’s fair to say
that Mehrsa reframed the literature on banking. She pushed the reset button,
I think, in a lot of ways. And I want to be very
specific about that. Banking, as opposed
to shadow banking– the scholarship on
banking, as opposed to the scholarship
on shadow banking, has generally been written
by those who believe in it. It’s a really interesting
kind of historiography, that the believers
wrote their own history. And so if you think
about the canonical works of Rondo Cameron, Richard
Timberlake, even more contentious
contributions like those of Naomi Lamoreaux, Charles
Calomiris, Stephen Haber– in those works, banks figure as
enormously valuable instruments of economic development, even
if their origins are parochial, even if they have flaws– for example, instability. Against this background,
Mehrsa Baradahan’s work makes a striking break. And I want to be
clear here, it’s not that she doesn’t
believe in banks quite. It’s that she believes
they’re profoundly shaped by their own
profit-driven logic. And that logic makes them
increasingly ill-equipped to serve as much as half
the American population. So as she put it
in her first book, as she conceptualized it, “A
kind of social compact used to require banks to earn the
privilege of money creation”– you can hear shades of Morgan’s
argument here as well– “used to require banks to earn
the privilege of money creation by including poorer
Americans in their services, and that that social compact,”
she wrote, “has broken down. Given that failure,
we’re obligated to think beyond our
current complacency about the way we organized
credit and its allocation in modern America.” It wasn’t clear, at
least to me, that Mehrsa could raise the stakes
in her argument, but she did just that
in her most recent book, The Color of Money: Black Banks
and the Racial Wealth Gap. In The Color of Money,
she explores the way white Americans
parlayed black banking into a solution
for black poverty and an engine for black
economic development, thus denying white societies’
responsibility for both, all the while leaving
in place barriers to black wealth
that would handicap both black banks and their
customer for decades, indeed to the present day. So the book is a prize-winning
tour into the forces that configure modern capitalism. Mehrsa’s scholarship has had
an enormous impact in part because it succeeds in
reaching three audiences. So I just want to mention those
audiences because, as we know, as all of us here
have dealt with, it’s really hard to do
money stuff in a way that’s accessible, both for our own
brains and those around us. But Mehrsa succeeds
in reaching, I’d say, three different
very important audiences. First, she has catalyzed
legal scholars– mainly, but not solely, in the fields
of financial regulation, monetary reform,
and poverty law– to attend to the crisis
of credit that she flags. Second, her books accessibly
explain enormously complicated issues, complete
with their history, normative argument, and
analysis, to a lay audience. That audience is enormously
important insofar as Mehrsa aims in significant part
at the policy making world, and at their influence
in that world. Popular understanding
and attention to the problems of low income
and non-discriminatory credit appear to have expanded
already, judging by the profile of her work. And that brings me to the
last audience that Mehrsa has. Policymakers and politicians
are registering and responding to Mehrsa’s arguments. We see that more
and more every day, from the first work
on postal banking, and the post office’s white
paper that followed that, to legislative proposals made
over the last several years for credit reform
and banking reform. Indeed, Elizabeth Warren,
who used to hang around here, has also been moving in
unrelated initiatives because of Mehrsa’s influence. In short, Marissa moves us
from thinking about banking to acting on reform,
and to acting on reform by thinking about banking. She connects our work here to
the world of social justice. In that way, she inspires
us truly to make money a democratic medium. Mehrsa. [APPLAUSE] MEHRSA BARADAHAN: Thank you. That was very overly generous. I really appreciate it. So I want to talk about the
racial wealth gap, which is staggering,
and I want to show the role of credit policies,
economic theories, and banking regulation in creating
and perpetuating it, and to explore why
the racial wealth gap hasn’t abated over time. To say that our
public policy efforts to eradicate the wealth gap
have been a total failure is an understatement. If we’re going to talk about
democracy, money, and banking markets, we need to consider
how racism and racial exclusion expose the myths
surrounding each. So I want to focus
specifically on black banks, because that’s what I
wrote the book about, but also because this
history sheds light on the relationships between
markets and state power. In fact, it is the lies we
tell about markets, I think, that present the biggest
obstacle to closing the racial wealth gap and
achieving economic justice. So I hardly need to preach to
this choir about these myths, but I’ll lay them out anyway. So one, that money
markets and trade exist outside the realm
of political power. Two, that inequality
is a natural byproduct of market forces rather than
being created by the state. And three, that
people left outside of the structures of power
can overcome these barriers through self-help
institutions or, sort of, local grassroots efforts. So the promise of
free market capitalism is that it does
not discriminate. This goes from Marx
to Adam Smith– or Adam Smith to Marx. Free markets offer equal
opportunity for all to trade and prosper based
on one’s skill and ability to produce. Yet history reveals
that, in fact, markets do discriminate–
or alternatively, that the American economy has
never borne any resemblance to a free market. For most of our
history, blacks have been excluded from occupations,
schools, neighborhoods, and trades. And their property was
not protected by law. Money, likewise, is
said to be apolitical. As Christine Desan explains
in a beautiful conclusion to a game-changing
book, Making Money, the revisionist history
of money likened it to water, neutral and colorless,
outside of the infrastructures of power. In fact, the color of money for
much of US history was white. White, too, was the color
of government credit. In each historical
moment when wealth was created, whether
through the Homestead Act, or the FHA mortgage
credit, farm loans, black communities were
shut out of land and wealth accumulation. Moreover, at certain
pivot points in history– specifically during
Reconstruction and the Civil Rights Era,
and I’ll talk about both– where black communities were
demanding state intervention and capital to remedy
past injustice, the rhetoric of free
market capitalism was used as a weapon. A self-help market of
segregated banks and businesses were offered as a decoy
for other, potentially more direct avenues for
inclusion in the economy. In other words, power
brokers promised that the market would fix
the problems created by law and backed by state violence. This last myth is not
limited to racial exclusion– the one about small
community banks. But using black banks
as a case study, I want to debunk what I think
is this broad, stubborn, and longstanding myth that
small community banking cooperatives are the
remedy to poverty, specifically from
marginalized communities. And I blame Thomas Jefferson
for starting this myth, and George Bailey
for perpetuating it every single Christmas. And it is high time for
a boycott of this movie. Who’s in? OK, great. Who, but the
absolutely heartless, would criticize
George Bailey’s bank? George Bailey’s bank is the
Jeffersonian fantasy bank. During the founding,
Hamilton pushed for a large, centralized,
government-coordinated banking system. He believed that a national
bank and a public credit system was not a mere matter
of private property but a political
machine of the greatest importance to the state. Jefferson, on the other hand,
believed that all federal power worked against the common man. He feared that powerful
centralized banking would favor the elites. And this fear was valid. The law of capital is that
it flows toward more capital. And the innate trajectory of any
banking system left unregulated is toward growth
and concentration, which in turn
breeds power, which inevitably leads to concentrated
wealth and inequality. Jefferson was, however,
wrong in his solutions. He rejected federal banking
and the federal credit system altogether. Still, his ideas
were very persuasive. Limits on bank size and
reach, like unit banking, were the norm
through US history. Jeffersonianism still
carries the day when it comes to solutions for poverty. So even as the Federal
Reserve and Wall Street have reached a size
that Jefferson could not have fathomed in his
worst nightmares, we still pretend that local
and small necessarily means egalitarian and accessible. And here comes George Bailey. The idea is that a
group of poor people– and imagine them as farmers,
widows, and coal miners– living in a free market economy
will pool their resources together, lend to each
other, and collectively lift themselves out of poverty. And this idea has seduced
not just the right, but also the left– or
maybe more so the left– who both seem to pine for the
noble Main Street community banker who made America great. The left focuses on the
nobility of George Bailey, who has ideals besides profit,
and the right focus is on how cheap and easy a
solution this is to inequality. You can be the change you
want to see without having to actually change anything. Neoliberal reforms
created mammoth banks all underwritten by
federal subsidies, and for those left
behind, offered a hodgepodge of microcredit
fantasies and incentives for entrepreneurs who do
good while doing well. So while JP Morgan gets–
according to Morgan Ricks– $900 million a year in interest
on their excess reserves, they’re celebrated for helping
indigenous woman set up a lending circle
somewhere in Bangladesh. And before you blame me
for being too cynical, let me assure you that I spent
a summer in college organizing microcredit in Cusco, Peru. It’s too bad there’s
no pictures of that. Then, I closely observed how the
New York Fed created the Maiden Lane SPV and used trillions of
dollars of money created out of thin air to buy up Wall
Street’s toxic mortgage-backed securities and the
derivatives accompanying them, making their creditors whole– which was nothing
like a lending circle. It’s not an exaggeration to say
that the history of community empowerment, or the theory
of community empowerment, in one form or another, has
been the foundational theory of every act of banking
legislation over the past 50 years aimed at financial
inclusion, inequality, or addressing the historic
racial exclusions in credit and banking services. And I’ll go through that
history in a second. These solutions are ineffective
but so clouded in goodwill that they’re practically
impossible to oppose. And let me be very clear, I have
nothing against the mythical George Bailey. In fact, I cry every single year
when the humble citizens come to the rescue of this bank. So boycott starts next year. Black banks especially have been
the heart of their communities. Many black banks were
founded by preachers, community leaders, and leaders
of the Civil Rights Movement. So just across town– I don’t know Boston well– Boston’s first black
bank was Unity Bank and was created in 1968. And its founders called it
the bank with a purpose, and explained to
the Harvard Crimson that they intended to have
a quasi-crusading role. For the communities
that they serve, black banks have been much
bigger than their balance sheets and have
served as a shield against economic exploitation. These banks have often had
a quasi-crusading role. They were symbols and sights of
community boycott and protest. They have stepped into the void
of Jim Crow and segregation to offer services amidst
banking exclusion. In 2016, this movement revived
on the heels of the Black Lives Matter movement with
a #bankblackpush as another means of protest. Killer Mike, who was
linked with this movement, explained that his motivation
was to take his money out of the dog’s hands
until they can better represent the population. But as community-oriented,
skilled, and celebrated as these banks and bankers were,
they could not build wealth nor could they take the
money out of the dog’s hand, because they could not overcome
the money-sucking centripetal pull of the dominant
banking market. The same forces that created
the need for these banks– so financial disenfranchisement,
segregation, and poverty– were the very
forces that impeded their ability to grow wealth. So racism and
housing segregation presented tangible and
observable economic effects on the black population
that you can see on these bank balance sheets. Yet the segregated
banking industry, and the self-help
rhetoric around it, has been advocated by both
reform-minded policymakers and cynical ones. Obviously, the cynical
ones are more of a problem. So in the quick
history that follows– and I’m going to cover
a lot of ground– I hope to demonstrate
the following– that insofar as the levers of
power were held by whites and the economy was based
on racial subordination, markets would perpetually block
black capital accumulation. So let’s start with
the economy of slavery. Slaves were assets,
credit, debt, and currency. Their bodies were akin
to capital and wealth. Between 1820 and the
Civil War, black banks across the South issued
notes with images of slaves printed on the money– and Sven Beckert
and Seth Rockman have done excellent work here–
showing that slaves were not just the generators
of cotton production, but they were collateral used
to finance the institution. Slavery modernized
credit markets, creating complex new forms of
financial instruments and trade networks through which
slaves could be mortgaged, exchanged, and used as leverage
to purchase more slaves. Americans and the British
built fortunes on slavery and defended the institution
with law and violence. Without getting
their hands dirty, the British developed the
common law on contracts to protect their
overseas investments. In the end, the Union
won the Civil War thanks to Grant and
Sherman, but also thanks to Lincoln’s Greenbacks,
and the Supreme Court’s decisions to uphold the legal
tender cases and the issuing of fiat currency. Greenbacks bankrupted
the South– the southern banking
system that was issuing their own currency–
and allowed the Union troops to buy provisions. As Keynes says of
legal tender, the state “claimed the right not only
to enforce the dictionary, but to write it,” in
this case with new money. And during Reconstruction,
the freedmen were expected to make
the transition from being capital to being capitalists. Freedmen and their
abolitionist allies demanded land as a form of
reparations and as a punishment for the treasonous Confederates. Without land, freedom
and justice, they said– and was true–
would be meaningless and participation in
capitalism would be a farce. President Andrew Johnson
vetoed the land grant and the Freedmen’s Bill,
except one provision– which I’ll get to in a second. He reasoned that the
freedmen would be protected by the free market. This is actually
true in his veto. You should really read it. They would be protected by
the free market and contract law, that they would
bargain for fair wages and buy their own land. So this was unbelievably
naive or incredibly cynical. The Southern economy was
nothing like a free market. Whites refuse to sell to blacks. Southern legislatures,
lawyers, and judges drafted laws governing
every aspect of black labor. And they restricted blacks
from skilled trades. Vagrancy laws were prevalent. Wages were capped by law and
by cabal between employers. And violations led to convict
labor without due process. By the end of the
Reconstruction era, most freedmen were
landless, voteless, and with practically every
profession blocked to them. Their only choice
was to grow cotton. Of course, that was
the whole point. The world cotton
markets were heavily dependent on cheap and abundant
cotton from the United States. And in order to have
enough cotton exports, the freedmen had to grow it. And for that to happen, they
could not be landowners. America could not go
the way of Haiti– that was the threat– where after independence,
the former slaves refused to grow sugar, the
slave crop, and output halted. They grew crops they
could eat instead. There was every
reason to believe that freed American slaves
would also go this route. In the meantime, the
federal government was actively providing free
land to private railroads for expansion and to
white men continually through the Homestead Acts. Blacks were denied land not
because the government was constrained by
laissez-faire but because, as Andrew Johnson
explained, America was and should remain a
white man’s government. This white man’s government had
control over capital and land because it had control over
lawmaking, in force, of course, by their monopoly on violence. But instead of getting land,
the freed slaves got a bank. In 1865, Union General
Oliver Otis Howard explained that a bank
was better than land because it would teach the
freedmen thrift and savings. Freedmen, he said, and I quote,
“should earn land and not receive it as a gift.” So was the Freedman’s
Bank, just– and he was a Union general. And so was the
Freeman’s Savings Bank justified by reformers,
and obviously Johnson. The Freedman’s
Savings Bank was one of the only tangible creations
of the Reconstruction era Freedman’s bill. No bank before or since has
resembled the Freedman’s Bank. It was created by Congress,
signed into law by Lincoln with a special charter. I mean, the Federal Reserve
was still decades away. We just barely had a currency. The bank was
immediately successful, and it was embraced
by the freed slaves. And the main reason they trusted
the bank with their money is that they thought
that it had the backing of the federal government. Why did they think this? Because the bills and the
notes had the building– and the building itself
had government insignia all over them. These notes seem to be
backed by the Treasury. And bank managers did nothing
to sort of, counter this image, and they plastered the
government insignia all over the building. And the mission of
the bank, according to the congressional
charter, was to safeguard the deposits
of the freed slaves. It was likened to
the savings banks that were popular in that era. It was not a commercial bank. No loans were given of any kind. It was a glorified piggy bank. For a decade, the bank also
disseminated propaganda throughout the South,
advertising a savings account as the best way of
getting land as responsible– and the data shows it that’s
actually how it was used, to save up for land. The capital of the
bank grew to what today would be
about $1.5 billion, too much money for the
white manager to resist. The bank president
was Henry Cook, who was brother of infamous Wall
Street speculator, Jay Cook. And he took the
deposits to speculate, to make personal profit
on railroad bonds. And when the bank
failed in 1874, depositors lost about
half their deposits. And the significance
of this failure reverberated and
lingered in the community in very interesting ways. Black leaders and black
bankers for almost a century repeated the assertion
that the bank had caused the black
community to not only trust white banks but also
their own banking sector. I actually began this
project because I was reviewing the FDIC
data on the unbanked, and I was struck by the
staggering racial differentials of the unbanked. In the South, blacks are
60% unbanked or underbanked, compared to like 10
or 13% for whites. And the number one
reason stated was distrust of the banking sector. And as I started
conducting interviews, the Freedman’s Bank came
up– this is in 2014. W.E.B. Du Bois says
of the failure, “Not even 10 additional
years of slavery could have done so
much to throttle the thrift of the freedmen
as the mismanagement and bankruptcy of the
Freedman’s Bank chartered by the nation for
their special aid.” Some believe that
they were purposely defrauded by Congress. In fact, Congress
wasn’t paying attention and neither was the
board of directors, which were filled with
philanthropists like John Jay and Thomas Webster. But Cook and his
colleagues had violated the law and the charter,
and no one was prosecuted. Henry Cook’s defense, when
he was asked by Congress, was that he was a mere
victim of the crisis. So the market stole the money. By the time the
Freedman’s Bank failed, a disenfranchisement of the
black population was complete. And the rights written into
the 13th to 15th Amendment were nullified by
legislatures, courts, police power, and
paramilitary-style violence by the Klan. In a series of decisions
between 1873 and 1898, the Supreme Court weakened
the rights of black citizens and blessed Jim Crow
and disenfranchisement. The chief judge, when outlawing
the Civil Rights Act of 1875, said that it’s been 20
years since slavery. It was time for the slaves to
stand on their own two feet and stop being, and I
quote, “the special favorite of the law.” In fact, for the next
century, the 14th Amendment came up more to
defend corporations against state
overreach than it did black men and women against
the hostile arm of the state. The state used its power
to uphold property rights and corporations–
their special favorite– rather than the rights
of black citizens. The myths used to justify these
decisions bear spelling out, because it was a pervasive–
and not just by white lawmakers, but black leaders as well,
like Booker T. Washington, who happened to be the leader
that white industrialists, like Rockefeller and
Carnegie, kept funding. Washington was influenced
by the gospel of prosperity and said that blacks
would achieve wealth through hard work and
thrift and that wealth would lead to
respect, which would leave to lead to integration,
and then political power. And history showed the
opposite, that once blacks accrued wealth, white resentment
would often lead to violence. So the Tulsa riot is
one dramatic example. So after the Freedman’s Bank,
black banks formed in response to Jim Crow in the South. Many were inspired by
Washington’s rhetoric, but most were born
out of necessity. So these banks were oriented
towards self-help and community building. They were linked with a
church, a fraternal society, a secret society, and insurance
and banking were usually part and parcel of the system. One of these banks was Maggie
Walker’s St Luke’s Bank. She was the first
woman of any race to starts a bank,
first black banker to be inducted into the
Virginia Bankers Association. Her bank was one of a
handful of black banks that survived the
Great Depression. And she saves
several other banks by merging them into hers. So I’m gonna pause and let
you enjoy this good story before we finish– before
I go onto the rest. I’m not close to
finishing, though. OK. So by 19– there won’t be
very many, more good stories. Sorry. By 1910, the Great
Migration north is met with
segregation, which leads to concentrated black
populations in northern cities which, of course, leads to
a demand for more banks. This was the heyday
of black banking, where 130 of these
banks are formed, and they’re in most
of the northern cities and segregated economies. If segregated banking
was ever going to work, it was during the
Roaring Twenties when segregation
was almost complete. However, these banks were
not able to create wealth. They couldn’t even keep the
wealth in their communities. One is their deposits. Their deposits were
small and volatile because of the
concentrated poverty of the black population. Small and volatile
deposits lead to high operating costs and
a lowered ability to lend because banks had to
offset the risk by holding, say, for assets, meaning more
capital and more reserves. Their assets were
on home mortgages in segregated neighborhoods that
even in the Roaring Twenties could not retain value. The first black family to
move l a white neighborhood paid a premium for purchase. Once a neighborhood tipped
into a black neighborhood, and this only took 5% to 10%
of black families moving in, white flight led to a
freefall in property values. This, unfortunately– this lack
of ability to retain property value is still the case. So these signs were not just
motivated by racism but also to protect home equity, which
was also based on racism. So same with racial covenants,
HOA associations, and sometimes bonds. Moreover, these banks
could not participate in the money-multiplying
magic of growing wealth in black communities. Because though you
can segregate people, you can’t segregate money. So these banks acted
as a sieve, with money leaking out of the community
with every lending transaction. And I’ll just show real quick. So this is a simple– I mean, those of
you who understand banking are going to think
this is overly simplistic, and those who maybe
are new to banking are going to think this
is too complicated. So I shouldn’t be doing this. But this is the basic money
multiplier that says if you– this is how banks create money. So having the money
multiplier here. So a black bank could get
deposits from a black customer, lend to a black borrower. But as soon as she
paid for the house, it would leak out into
the financial system. And black bankers were
constantly frustrated by this sieve-like quality. And white banks weren’t lending
back into the community. Actually, Chase
Manhattan Bank had several locations in
Harlem, where they’re happily taking deposits. But these branches did
not offer any loans. They took deposits from Harlem
and made loans downtown. One bank manager explained
in his PhD dissertation that I found explaining
this very matter-of-factly, and he says that it
was too risky to lend because blacks were not
really good businessmen. George Bernard Shaw reveals
the backwards logic here. “The haughty American
nation,” he says, “makes the Negro clean
its boots and then proves the moral and
physical inferiority of the Negro by the fact
that he is a shoeblack.” Oddly, Harlem was the only place
where large black population did not have a bank– at all– during this time. And the reason, I suspect– and
I think I support this theory in the book– has to do with the
state banking regulator. It’s very discretionary
to offer a charter there, and they were very cozy
with Chase Manhattan, who was quite enjoying their
monopoly on deposits uptown. As James Baldwin says, “White
is a metaphor for power, and that is a way of describing
Chase Manhattan Bank.” I found this quote after I
had already finished the book, and I think I need to
write another book just to start with this quote
because it’s brilliant. Meanwhile, in
Chicago, Binga’s bank was the largest
and most successful commercial bank during this
era and was the most profitable of the black banks. He bought a house in a nice
neighborhood incidentally, and it was bombed seven times. And he kept moving back in. Binga had joined a
Chicago clearinghouse, which is where good
banks went before there was FDIC insurance. The point of these
clearinghouses was to protect all
the member banks during a liquidity crisis. This clearinghouse refused
to help Binga’s bank. If we understand trust to be
the basis of sound banking, then racism threats the very
viability of black banks. They did not trust his bank,
which they use actually racial expletives to describe. All the other members of
the clearinghouse survived. So racism also had a tangible
effect on his mortgage– on his asset, sort
of, portfolio. Binga explained that he selected
the best of his mortgages– and he couldn’t sell them,
even for a haircut of 50%. So his bank is liquidated. This is during the Great
Depression, so lots of banks failed. And that’s not even
the worst of it. As far as I can tell
very few banks– some sources say no
bankers went to prison after the Great Depression
for their failure of banks. If someone can find this
source, I’ve dug around. Some say no bankers
went to jail. Binga did go to jail. The state brings criminal
penalties against Binga for violating state banking law. He goes to prison for 10
years until he’s exonerated from the trumped-up charges
by Clarence Darrow himself. So Binga’s wealth did not lead
to political power or equality. The truth was that
absolute equality before the law
had to come first. So what happens during the New
Deal makes this quite explicit. Roosevelt restructures the
US Banking and credit markets through heavy
state intervention. Between 1933 and 1970,
hundreds of thousands of small community banks,
credit unions, thrifts, and ILCs are formed. They’re safe, stable,
and profitable. And the reason these
small banks are thriving is because the New Deal
essentially takes the risk out of banking, or bank lending. So deposits are
insured by the FDIC, and loans are subsidized by
the FHA, the GI Bill, farm loan programs, and Fannie Mae. As Perry Mehrling has said,
in effect, the effect of this is if the government
said you were solvent then you were, because the
government would stand behind you and prop you up. So the government made
these banks solvent. There was no historic
past of credit unions until credit unions
became solvent. All of this built the
middle class and created intergenerational wealth through
homeownership and low-cost higher ed– which, again, made
America great. In return, banks are heavily
regulated with interest rate caps, geographic restrictions,
activity restrictions, capital controls. For a while, the
only competition allowed between banks is who
can offer the best toaster. So the mythical
Bailey’s bank in 1945 was not actually taking
money from the nice residents of Bedford Falls and
investing it in homes. It was doing that, right? But all the home mortgages
that thrifts lent were FHA mortgages,
just like Potter’s bank. So this was Jeffersonian ends
through Hamiltonian means, local and small
banks made possible through large federal
credit programs. In other words, public
policy protected banks and kept them small,
because that is the banking sector that Roosevelt
and his Congress decided that they wanted. The very idea of
capitalism was under threat before the New Deal. In his inaugural
address, Roosevelt claimed that no less than the
future of a central democracy depended on getting
these reforms right. So the New Deal responded
with a Keynesian program that was as close
to state planning or democratic socialism
as the US ever came. Afterwards, with businesses
and banks moving, we go back– booming, sorry– we go
back to telling stories about the triumphs
of the free market. This wasn’t the only irony. From Jefferson to Wilson,
from the Constitution to the New Deal,
progressive reformists fought Big Money power for
the sake of the people, and their reforms were built on
a bedrock of white supremacy. So Wilson’s progressive
reforms broke up monopolies, gave unions credit
collective bargaining power, established the FTC, set
up the farm loan banks, established the Federal
Reserve to break up the monopolies of
credit that hinder the true liberties of men,
and he institutionalized Jim Crow in the federal government. He screened Birth of a
Nation in the White House, which is the movie
that lionized the Klan. It was Southern
Democrats in the Senate that pushed FDR’s New Deal,
the same Southern bloc that made sure that no anti-lynching
bill reached the floor, despite 240 attempts. So the New Deal built
the lily-white suburb of homeowners and the segregated
black ghetto through redlining. And I’m going to use
the word “ghetto” because it’s more accurate. Black community assumes–
which is the term mostly used– assumes that geographic
segregation was voluntary. The HOLC appraisers
used census data and elaborate
questionnaires to predict the likelihood of
property association in neighborhoods
across the country. So these maps had
four categories based on perceived risk. So A was green, no risk,
down to red, highly risky– green being the most
desirable, red being the least. And in making these judgments
about a home’s potential to appreciate, these
HOLC mapmakers, like individual
appraisers before them, used race as the
number one indicator of risk and desirability. So green neighborhoods
were homogeneous and white. At the other end,
red neighborhoods were predominantly black
or racially inharmonious. So this is one form in Atlanta. This is called, as
you can see, “The best Negro section in Atlanta.” And if you look
at that top line, it measures
percentage of Negroes. So this is businessmen– right next to Spelman
and Morehouse, the two black colleges. And the top line is
percentage of Negroes and the percentage
of foreign-born, and then infiltration
of those races. That was the method
used to determine race. So FHA bureaucrats
actually advised developers to include racial covenants
and for realtors not to show blacks homes
in white neighborhoods because they would lose
their FHA financing. The FHA maps were essentially
geographic risk management. They cordoned off risks
of concentrated poverty in the black ghetto and
created Jim Crow credit markets essentially. So as the white American economy
grew by leaps and bounds, a segregated black
economy became locked in a state of
perpetual depression due to exclusion
and exploitation. So on top of the FHA mortgages,
a dual market and consumer credit was also created
during this time. The FHA had a consumer
credit guarantee, but it was short-lived,
but around long enough to create a secondary
market in consumer credit. So in the suburbs,
department stores began offering credit cards
with a revolving credit line. And this type of
credit was flexible. It was low interest. In the black ghetto, there
was only installment credit. Consumers with little wealth
bought most necessities– including medical
care and appliances– on installment credit. And the way that these
contracts were structured was that the goods purchased
were bundled together. And each payment went to pay off
a slice of the total interest and principal. So if a few payments
were missed, the borrower was
deemed to be in default of the entire bundle of goods. And this was done
through contract law and enforced by the law. So defaults involved repo
men, criminal penalties, sometimes threats
of bodily injury from the shadier
installment creditors– much different than
revolving credit. And because of the
high cost of credit, ghetto residents were
paying three to five times more for lower quality
goods and services. So before there was a
Montgomery bus boycott, there were boycotts and protests
of these installment credit arrangements. In Harlem, the boycotts were
even sanctioned by the courts. And a few community
groups teamed up with state legislators
to push these reforms. In Anne Fleming’s new
book, City of Debtors, she talks about activists,
lawyers, and judges who use the unconscionability
doctrine in contract to invalidate these contracts. And this movement
hit, unfortunately, against a wall of
market fundamentalism and the sanctity of
contract in the 1970s. So in the meantime, the
Civil Rights Movement picks up heat, and with
it the establishment of a new movement for credit. The leaders of the movement,
both the intergrationists and the nationalists,
saw economic rights going hand-in-hand with civil rights. So Malcolm X saw the ghetto
economy as white exploitation, akin to colonialism abroad. Black nationalists
expressed solidarity with global
anti-colonization movements and demanded sovereignty. So why should the white
people be running the banks in our community? Malcolm X said, and I quote,
“A revolution is based on land. A revolutionary wants land so
he can set up his own nation, an independent nation.” Martin Luther King was
the opposite, right? He’s an intergrationist. Not the opposite– they
shared a lot in common. Before Martin Luther King
became a national figure, he was on the board
of a black bank. And in laying out the
movement’s future in 1956, he had six goals
for the movement. Number one, he said, was
to establish a black bank in Montgomery because
white banks were not lending to blacks. Two, it was to organize
a credit union. He says, “We are
anxious to demonstrate that cooperation
rather than competition is the way to solve
our problems.” Later down the list was voting. If you listen to the momentous
“I Have a Dream” speech– and I was going to show
it, but save time– “I Have a Dream” speech
from a banking experience, you can see that King
is asking for redress. So I’ll just read it. “In a sense,” he says, “we’ve
come to our nation’s capital to cash a check. When the architects
of our republic wrote the magnificent
words of the Constitution and the Declaration
of Independence, they were signing a promissory
note to which every American was to fall heir. This note was a promise
that all men, yes, black men as well as white
men, would be guaranteed the ‘unalienable rights’
of ‘life, liberty, and the pursuit of happiness.’ It is obvious today that
America has defaulted on this promissory note,
insofar as her citizens of color are concerned. Instead of honoring
the sacred obligation, America has given
the Negro people a bad check, a check
which has come back marked insufficient funds. But we refuse to believe
that the bank of justice is bankrupt. We refuse to believe
that there are insufficient funds in the
great vaults of opportunity of this nation. And so we’ve come to cash
this check, a check that will give upon demand the
rights and riches of freedom and the security of justice.” King, who chose his
words carefully, was not advocating
colorblindness or to be judged by the
content of one’s character, not the color of one’s skin. He was asking for
that, but he was also asking for a remedy for past
injustice in economic terms. He was explicit
about this later. But by then he was too
unpopular and radical for anyone to listen to. King said, and this is a
quote, “the underlying purpose of segregation was to oppress
and exploit the segregated, not simply to keep them apart.” He said, “The basic
purpose of segregation was to perpetuate
injustice and inequality.” In other words, the
state created inequality. Segregation had nothing
to do with free markets and neither did poverty. His last speech before his
death, he proposes a “bank-in” movement coupled with
collective action in Memphis. His last movement was akin to a
populist movement of the past. It was a poor
people’s movement like the past populist revolutions. Everything changes
between 1965 and 1968. The civil rights law,
the voting rights law, Brown versus Board of Ed,
Montgomery Bus Boycott, Selma March– all of those
happened before 1965. The national appetite
for civil rights reform shifted so much that by 1966,
Roger Wilkins of the NAACP says, “It would have
been hard to pass the Emancipation Proclamation in
the atmosphere prevailing now.” By 1969, Malcolm X,
King, John F. Kennedy, Robert Kennedy had
all been killed. Johnson’s out of office or
announcing that he will be. And the consensus of the black
community toward the Civil Rights Movement, if there was
one, was that it had failed– at least it was incomplete. Yes, the “Whites Only”
signs were now gone, but joblessness,
dilapidated housing, and intractable
poverty were not. The Federal Reserve
studied inequality in 1967 and found that blacks had one
fifth the wealth of whites, and half of black children
grew up in deep poverty, compared to 9% of
white children. So black protests turned
to a resistance movements, and black ghettos across the
country erupt in violence. To many, it felt
like a domestic war. CBS called it a rebellion,
says, “This is not a riot. It was an insurrection
against all authority.” So there are several commissions
to study these riots. The Kerner Commission
is the most famous one, and it comes out the last year
in the Johnson presidency. And it is scathing. It says, “What white America
have never fully understood but what the Negro
can never forget is that white society is deeply
implicated in the ghetto. White institutions created it,
white institutions maintain it, and white society condones it.” There were also two hearings
conducted by the Senate Banking Committee chaired by Senator
Proxmire with studies presented by the FTC. And the FTC finds that
blacks living in the ghetto are paying more for everything
than in the suburbs. And there’s three
conclusions specifically that this hearing finds. One is that the rioters are
targeting lenders and saying things like, burn the books. These lenders were the
symbols of white oppression in the ghetto. Two, that these rioters– and this is the one everyone
sort of hangs their hat on– that these rioters are
leaving black lenders and black businesses alone. As Senator Javits calls them,
“soul brother establishments” were not targeted. And three– and
this is the one that is supported by both
studies but ignored by everyone else– is that these
lenders aren’t making a profit. They just operate in a
different lending market. As Louis Hyman shows
in his excellent work, 94% of the difference in costs
between installment credit and revolving credit
had to do with increased risks and default. So Proxmire’s big
push is to create credit unions in the ghetto. Proxmire was a very
enlightened Jeffersonian. He believed in the
public duties of banks, but he was obsessed with
small business, credit unions, local banks, George
Bailey, I guess, against federal spending. So he would pass the
Community Reinvestment Act a few years later to
force white banks to lend into the red line areas. These programs, though,
ignored the main finding, which is the market
needed to be changed. But this was one
among many proposals that the 1968 election
brought to the fore. So Robert Kennedy, Humphrey,
Nelson, Rockefeller all had programs, including
extending the Great Society programs. Romney, who was a candidate
until he made a big gaffe, described the white suburbs
as a high-income white noose around the black inner city. And he said it was the
government’s job to fix it. So Nixon is the
winning candidate. And he decides to use white
backlash to civil rights as his coalition
building platform. In 1968, Nixon couldn’t explain,
like Andrew Johnson had done, that this is a white
man’s government. He had to be more subtle. But his top aide,
Ehrlichman admits there was a subliminal
anti-black message to all of his
advertisements and speeches. So his campaign issued these
fear-stoking images of rioting, and with a voiceover
that says, we shall have law and order
in the United States. To defeat economic reforms
that were being advocated by black activists,
other Democrats, and a wing of his own party,
he used black capitalism. And this is the part of
the Southern strategy that I think has
been forgotten, and I try to cover it in my book. So Nixon co-ops the language
of the Black Power Movement. Black capitalism is so vague
that it appeals to everybody. To blacks, it seems like it
would be a grant to power. So Nixon says,
blacks in the ghetto have to have more
than equal chance; they would get a dividend. To suburban whites, it
would cure violence. He said, people who own
their homes don’t burn them. To middle-class voters
who love George Bailey, any program using the
words “entrepreneurship” and “self-help” struck a chord. To fiscal hawks, it
would cost nothing. He said, instead of government
jobs and government housing and government welfare,
let Government– the greatest engine of progress
ever developed in the history of man– use American private enterprise. So this is his platform–
it’s black capitalism. I won’t play the ad, although
it’s very interesting. I want to focus here–
so this is his ad. Basically, we will
have integration later. This last line, he
says, “It’s time to move past the
old civil rights and to bridge the gap
between freedom and dignity, between promise
and fulfillment.” I looked in the Nixon archives
of the first five drafts of this. And at first it said,
“forget civil rights.” And then the next– and
then someone crossed it out, and they were like,
“move beyond.” And then it became, “move
past the old civil rights.” But the message was the same. He put it actually bluntly
in another talk to the Senate Republicans where he
says if he gets elected, I’m going to “lay off
the pro-Negro crap.” So in order to see how great a
political diversion this was, you have to look at
the paths not taken. So going into 1968, the
reform paths were clear– either integration
or reparations, both of which are
being actively pursued. Integration was pushed forward
by MLK Coalition, the Kerner Commission, Johnson, Romney,
and Romney’s wing of the GOP. And the logic, as James Baldwin
explains– sorry there’s so many Baldwin quotes. But– I just wish I was
more of a Baldwin writer. So he says, “a ghetto can
be improved in one way only, out of existence.” And that’s what Johnson was
trying to do with the FHA– Fair Housing Act,
unlike the other one. He pushed through Congress
the Fair Housing Act just four days
after MLK is killed. He sort of takes
a stunned nation and gets his bill through. And he says it’s the most
important bill he passed. The law says that the
government, the HUD, should affirmatively
further fair housing– which was understood to
mean integration programs. So Nixon appoints Romney
as his HUD secretary. And Romney is the only member
of Nixon’s cabinet interested in pushing forward on civil
rights instead of pulling back. So a Times column
describes Nixon’s cabinet as “George Romney and
11 fellows named Clyde.” A black activist called it
“Uncle Strom’s Cabinet.” So Romney pushed
hard for integration, and Nixon fights him
every step of the way. And he tries to
send him to Mexico. And Romney writes him this
note with this line underlined. He says, the poor “cannot
continue to be isolated in the deteriorating
core cities without broad-scale revolution.” He underlines it
as if Nixon cares about the logic of integration. So he shuts him out of the
administration in 1972, sends him away. The other option
was reparations. And demands for
reparations were not just provocations by radical
groups like the Black Panthers. There was actually one
program that got to Congress and got proposed. It was bipartisan. It was the CORE plan by Roy
Innis and Floyd McKissick. It involved treasury financing
and a large-scale capital program. Nixon met Roy Innis
and Floyd McKissick but refused to talk to
them after getting elected, even though he starts
to co-op their language. So no reparations,
no integration. Black capitalism instead. Just like Andrew Johnson
during Reconstruction, no land, but how about some deposits? So with much fanfare,
Nixon deposits millions of dollars of treasury accounts
into black banks to aid them. As you all understand,
deposits are not the same thing as capital. In fact, quite the opposite. Unity Bank across town said that
they got deposits from the post office, which were small. They had to go pick
them up every day. It cost them more to get these
deposits than it was worth, so they stopped getting them. He also creates the Office of
Minority Business Enterprise, the OMBE, which cannibalizes
the budget of Johnson’s poverty programs. So Humphrey says
during the campaign, “Talking about black
capitalism without capital is just kiting
political checks.” You can’t have capitalism
without capital, but this was exactly the plan. No capital, just deposits. When a black
official at the OMBE actually tried to put forward
a plan costing $8.6 billion, Nixon’s Commerce
Secretary, Maurice Stans, who was one of the
Clydes, shut it down. In a memo to the OMBE– and I can’t believe they
wrote this stuff down– Stans says that “the most
important objective”– I’m quoting– “was to
create success stories, which would create pride
among the minority. What the black people,
the minority people, need more than anything
else”– more than anything else, emphasis mine– “today is a modern
Horatio Alger.” So another piece of
the Nixon’s program was affirmative action,
which nobody lobbied for. It was a weak compromise. So Nixon asked his SBA to ask
corporations to voluntarily hire more black employees and
to set aside some contracts for black businesses. But this program obviously
garnered a lot of hostility because it cost more to whites. Soon, any affirmative
action program was called reverse
discrimination and cut down–
actually, many opposed them using Martin
Luther King’s own words, “content of character.” As Justice Roberts said in 2014
in advocating colorblind laws, he said, the way to
stop discrimination on the basis of race is
to stop discrimination on the basis of race. So black capitalism was anemic
and utterly unresponsive to the needs of the
black community, but it was a very clever decoy. This was Nixon’s
detente on race. He took the sting out of
the black radicals’ demands for black power, jettisoned the
Johnson anti-poverty program, maintained his opposition
to integration, and even won the support
of a few black leaders. So checkmate. Incidentally, a black leader
that was not in on the hoax, was Andrew Brimmer, who was born
to a family of sharecroppers and received a PhD in
economics from Harvard. He was Johnson’s appointment
for the Federal Reserve governor, first black governor
of the Federal Reserve. And he denounced capitalism. He says, this doesn’t work. It’s a cruel hoax. You cannot have capitalism
without capital. So I want to pause here to
consider the coincidence that it was this
exact moment when the neoliberal ideas of
limited government and market fundamentalism went
viral, so to speak, and broke out of the
academy and into politics. In fact, the most potent weapon
against the demand for capital was capitalism. As soon as the black
community began asking for a share of
wealth created by New Deal Keynesianism, the response
was hardcore capitalism with a libertarian edge. So Alan Greenspan serves
as Nixon’s economic advisor before the campaign. He writes in a memo in
1967 on the urban riots. He calls the protests “an
attack on America’s system of free enterprise and
individual rights.” He says, “The
critical question is whether the Negroes
are correct in claiming they have been exploited.” His answer, no. “The charge of exploitation
in the sense of value being extracted from the Negroes
without their consent for the profit of the
whites is clearly false. This distinction between
discrimination and exploitation is all the difference
in the world.” He said that the
higher prices were justified by the laws
of supply and demand. There were higher
risk, and therefore it was erroneous to
claim exploitation. So he suggests–
and this is where Nixon gets his anti-black
capitalism program, is from Alan Greenspan– he
suggests that Nixon should help the Negroes help themselves,
and any capitulation to their demands for
integration or reparations was anti-capitalist and an
attack on free enterprise. Milton Friedman even
claimed basic civil rights anti-discrimination laws
were anti-capitalist, and an interference–
this is the quote– “with the freedom of
individuals to enter into voluntary contracts.” He compared the civil rights
laws with the Nuremberg Codes. It was all unjustified
government intervention. It was oppressive. And Friedman said that the
markets would naturally root out discrimination because
anyone who opposed buying goods from black businessmen or
employing black employees was being inefficient and
would pay a higher price for that prejudice. Theoretically, this was true. But historically, it was not. Whites did not pay a
higher cost for racism. Quite the opposite, it
was the black ghetto that bore the cost. The reality was
that the ghetto was the only place on the map
where the full price of credit was being paid– to loan sharks, who couldn’t
reduce the risk of default by selling off their loans
to the secondary market. Everywhere else were
subsidies, federal insurance, secondary markets. And this had nothing
to do with capitalism. For Jim Crow in the South
and segregation in the North were all heavy
state interventions. You’d think Friedman and his
Chicago economics department would have been on the front
lines of the Civil Rights Movement to deregulate the– get rid of Jim Crow. That’s not what happened. So Friedman and
Greenspan, like Ayn Rand, were not describing the
world as it was or had been, but fantasizing
an imaginary one. As Quinn Slobodian– sorry– explains in his
excellent new book, this was the mission of
Hayek, and the Mont Pelerin Society as well. And they also used the rhetoric
of neoliberal free market capitalism to oppose South
African rights for land. So these theories were
elegant and often assumed perfect information
and rational behavior. They were aspirational faiths
but not accurate descriptions of the real world. You could be
forgiven for thinking this ideological movement
was a direct response to the economic demands
of the black activists. So Lee Atwater, his famous
quote, he talks about, first you’re saying
racial expletives, and then you’re
talking about tax cuts. You’re opposing black
claims using economic terms. That was his famous
deathbed confession. But there were
other links as well. The John Birch Society starts
alongside the Goldwater movement, and it’s an
example of an early alliance between the Wallace
segregationists and the libertarians. Another link was
John Olin, who began to funnel money toward
libertarian organizations, including his own Olin
Foundation, the Federalist Society, and the law
and econ movement. He was radicalized, if you
will, after witnessing the 1969 takeover of the Cornell
campus by Black Power groups during Alumni Weekend. Olin also funded Charles
Murray’s research which produced several
tracts on, you know, genetic racial inferiority,
including The Bell Curve. And speaking of
pseudoscience, each era has its dogma justifying racial
inequality and oppression. In the Antebellum era,
Christian doctrine was corrupted to hold that white
men had a divine right, even duty some said, to subjugate
and enslave blacks. When religious theory
fell out of favor, it was natural selection. So Social Darwinists made
spiffy-looking pseudoscientific charts of racial progress
using skull measurements. Colonialism abroad and
racial inequality at home were justified as just
the laws of nature. After those theories
were sort of discredited by being put
into practice by the Nazis, that theory was unpopular. And so the laws of
the market, I think, came to replace the laws
of nature and of God. Economic theory and the
law of supply and demand were the reason black
labor was undervalued and credit cost more. Any effort to change this
market was harmful government interference with
what Reagan called “the magic of the marketplace.” And just as God’s will
was difficult to challenge in the 1800s, so too was
free market economic theory, lest one be labeled a
heretic or a communist. These theories of capitalism
proved very useful. But a lot of their
most avid proponents use them very
hypocritically, as they ran alongside a very draconian
criminal justice system. Reagan’s gubernatorial campaign
ran ads of footage of violence with a voiceover saying,
“Every day the jungle draws a little closer.” Goldwater suggested that
Stokely Carmichael should be sentenced to death for treason. So began the slow depriving
of rights and livelihoods of generations of black men. But racial capitalism was
as durable as it was weak. Every administration
since Nixon has had a version of black capitalism. The Ford administration changes
it to minority enterprise. Ford says, black
capitalism is not a civil rights program
or jobs program, it’s a business program. This is not an apology. It’s a boast. Carter increased
government purchases. President Reagan,
of course, sharpened the weapon of free market
capitalism against government. He claimed that the best way
to fight racial inequality was to oppose welfare,
minimum wages, and tax cuts. So it was an economic
bill of rights. He said that minority business
development is the key to black economic progress. So black initiatives slowly– which began as a
neutralizing response to one of the biggest racial
uprisings in history– were soon programs
reduced to congratulating a few black businessmen. And what got added is
other sort of minorities and female entrepreneurs. So Carter and Reagan
included women in the SBA and DBA programs– they changed the name. The theory of black enterprise
was no longer discussed as an anti-poverty measure,
nor was it about black power. It was about, sort
of, diversity, representation– all of
which are great motives, but not what was the
purpose of these programs. So Clinton cut welfare, decrying
a culture of independence, and declared that
minority businesses would prove that we can bring the
benefits of free enterprise to every neighborhood
in America. All free enterprise needed
was a nudge from the tax code. So Clinton passes
the CDFI program which was modeled after
ShoreBank– the country’s most famous black
bank, even though it was not really black-owned. ShoreBank’s motto is,
“let’s change the world,” and has a threefold mission– first, profitability, second,
community development impact, and third, an
environmental return. This is where
Muhammad Yunus goes to be inspired to create Grameen
International nationwide. So maybe I’ll, real
quick, show this. [VIDEO PLAYBACK] – Muhammad Yunus had
brought a lot of attention to microfinance and
got a Nobel Prize. Tell me, when you look at
it, how effective is it, and how much is it spreading. – First, it is almost
universally effective where it’s done based
on the same model that he and the other big
givers in Bangladesh have used– that is, where you really– you realize you may be dealing
with people who have never had a balance sheet, but
they have a good reputation in the community, you
know they’ve got a skill, and there’s clearly a market
for what they want to do. In the early– [END VIDEO PLAYBACK] MEHRSA BARADAHAN:
So Nixon had tried to induce white
firms to voluntarily hire black employees and
to give these contracts. But Clinton promises profits. So as HUD secretary Andrew Cuomo
said, “It’s not about charity. It’s about investment.” Harvard professor Michael
Porter wrote that the best way for the economy of the ghetto– to improve it– was through
private for-profit initiatives and investment based on
economic self-interest and genuine advantage. Businesses had to exploit
the competitive advantage of inner cities. Lawrence Summers,
Treasury Secretary, said, minority banks were
like niche venture capital firms that deploy their superior
knowledge of an emerging market, niche, to
invest and manage risk better than other investors. These banks were
called market scouts, never mind that black-owned
banks have long been using– scouting these
markets for profits. So as deregulation was creating
profitable global monopolies, minorities were being
told that to prosper they should focus small and local. Jeffersonianism, still alive. The ghetto is now called
“enterprise zone”, “emerging market”, “untapped
market,” Trump just released an “opportunity zone” program. And the idea was
that entrepreneurs would make profits, and
it would be win-win. So instead of capital, the
ghetto would get entrepreneurs. And eventually,
the entrepreneurs do end up finding profits. They’re called subprime loans. And– so I’m going to skip– so this infrastructure
continues to today. This is Obama’s promise to
help bring businesses back. There is now a department
in every banking agency– the Fed, OCC, Treasury–
for minority banks. From laws like
FIRREA to Dodd-Frank, there are minority
bank push, not to mention the CRA and the
CDFI, which are the big ones. So this continues–
this is Trump– with the rhetoric of self-help. So I was at the
Treasury Department during the Trump
administration when the Treasury
Secretary, Jack Lew, was asked about the
racial wealth gap. And the event, by the
way, was the Treasury naming a wing, “The
Freedman’s Bank,” without any sense of irony. In fact, this would
be the first time that the Treasury was linked
with the Freedman’s Bank. So Jack Lew responded that,
yes, the racial wealth gap was a problem. But, and I quote,
“A lot of people say they can’t afford to save. I understand. Living on a paycheck income
is really challenging. I experienced this at the
beginning of my career, and I know it’s hard. By the same token, most
people buy a cup of coffee without thinking about it. Most people buy an
extra magazine or video without thinking about it. If you take the accumulated
decisions people make lightly and on one of these
occasions say, I’m going to put my money
away for retirement, you’d see people
start with more. I think financial education,
financial literacy is about understanding that
some people buying a home might not be a good idea.” Coffee and magazines. Meanwhile, the financial crisis
wiped out 53% of the wealth of the black community–
mostly through subprime loans– which were disproportionately
given to black borrowers. By 2009, 35% of black families
had zero to negative wealth. Rory Van Loo and Pamela Foohey
have done excellent work on disparities in bankruptcy
filings of these families of racial disparities. Former Congressman Brad
Miller called the crisis “an extinction level event”
for black communities. This was made
possible, of course, by theories of free market
fundamentalism being applied to banking regulation. So while the administrative
state deregulated markets with one hand, creating
behemoth financial oligopolies, with the other, they
offered the powerless and the disenfranchised
microfinance and financial education. So the idea– again, we’re
reviving Karl Polanyi, but there’s a quote. So the ideas industry, led by
the Chicago school neoliberals and expounded by
Greenspan, Friedman, and the Olin Foundation’s
law and econ takeover, all push the idea that banking
law and monetary policy was the domain of
technocrats with models, that money was this fixed
universal substance, like Plato’s theory
of Forms, as opposed to just a legal form
created by a government. The theory is that
monetary policy was akin to an equation
that could be solved rather than a decision to be made. This takes an absurd form when
libertarians start proposing bitcoin as better than money. It goes back to the black
box discussion we had yesterday with Eric and Anna. That the laws of the market
could be measured and observed like the laws of nature– so if you brought up
inequality or racism or any social consideration,
it was because you didn’t understand how markets work. Morality, public duty, social
responsibility, justice– those are all nice but had
nothing to do with markets. Legal academics, our field,
especially in the business and banking law, began
talking like economists, and apologizing for
not being economists. And this has a lot to do
with the Olin law and econ takeover of law schools. And instead of talking about
democracy, power, and law, they spoke the language
of law and econ, or if especially
liberal, sometimes just behavioral economics. Obviously there are
exceptions in the room– Bob, Saule,
Christine– actually, all the legal people here. The demise of the
New Deal regulations created powerful and
profitable banks. But that was the point. Deregulation was not just
about removing restrictions. It changed the way policymakers
talked about banks and money. The government’s focus changed
from a paramount objective of keeping banks small,
powerless, and democratic, which was Jeffersonian,
to ensuring that banks a profitable and efficient. Read Saule Omarova’s
The Quiet Metamorphosis to understand exactly
how this worked. Banks were relieved
of public obligations. Their only obligation
was to manage risk. But they didn’t. And when it came time for free
markets to do their things, which is market discipline,
the government lost its nerve. And I’m going to
wrap up right now. The financial crisis
revealed that the deal had been lopsided, that government
had waived the restrictions but was holding the bag
when the banks failed. If anything, the
central bank is now more involved in holding
more assets in the banking sector than ever before. So surely if the government
creates guarantees and subsidizes the
credit markets, that must mean the banks cannot
exclude a significant portion of the public from the
bounty of government support, or actively exploit
vulnerable populations. And so the problems of payday
lending, debt fraud, redlining, the racial wealth gap are more
than just market problems. They’re social and
political problems. Money and credit
policy must create– must have an active role. And– so I was going
to march through– I don’t have time– how from Jackson to
Jefferson, they were wrong. I mean, William Jennings
Bryan was perhaps being dramatic that
the common people were being hung by a cross of gold. But could we not make the
claim today that the 98% is being harmed by the Fed’s
monetary policy decision to use QE to purchase
mortgage-backed securities instead of, say, modifying
mortgage loans, or maybe funding Title I schools? And Brandeis, you know,
calling banks a public utility, because they were using
other people’s money, perhaps now they’re not. As Morgan and
others demonstrated, they are using money
created by the central bank. So the question now– and I’m going to finish. This went longer than I thought. The question is
how do we fix it? We have to stop watching
It’s a Wonderful Life. For the last 200
years, the answer has been community
banking, minority banking, begging big banks to
lend through carrots and sticks, or just
not buying lattes. But it hasn’t worked, and banks
have just not been interested. And so it’s time to drop the
theory that private banks are necessarily intermediaries. We need a public option. And many here have proposed
many good proposals. Morgan and John and Lev
talked about the fed accounts. Saule and Bob have
done amazing work showing the banks are
a public franchise. Derrick Hamilton talked about
baby bonds and jobs guarantee. MMT, the positive money people. Mike [? Consol, ?] William
[? Greiter– ?] Lots of people have very good ideas here. I’ve just proposed a 21st
century Homestead Act with Federal Reserve
financing that would target the racial wealth gap. So we have to shed
the destructive myth that capitalism will fix
what public policy created. We cannot deflect the
responsibility of economic equality onto these
communities alone. W.E.B. Du Bois declared in
1948 that the great problem of American democracy was that
it had not yet been tried. So perhaps it’s time to try. [APPLAUSE] CHRISTINE DESAN: Maybe
what we should do is just take a
couple of questions. I lost the microphone, which
is good, it’s the second day. Does anyone have the
microphone by any chance? Whoever has the microphone
has the first question. First question, from someone
who hasn’t spoken yet. AUDIENCE: Thank you so much. We heard yesterday
about payment systems. And for instance, PayPal
sort of holds up its mission as sort of financial inclusion
and democratizing access. What’s been the track
record of fintech companies? And are there opportunities
maybe to fold them in as well? MEHRSA BARADAHAN: Thank you. I mean, poor– and this is
another one of those myths, right? It’s really bad. This is– I go into
this in the first book. This fintech bias that every– you know, the treasury is
all bound up in fintech, so if you try to say, hey postal
banking, brick and mortar. The poor live in cash. If you’re unbanked, you don’t
have a bank account, right? And all of the
fintech providers, PayPal and Square,
all of them, Venmo, operate on a bank
account, right? So I even talked– and I
talked to Jack Morrissey about financial inclusion. He’s like, oh, Square,
we don’t use a bank. I’m like, yes, you do. I know the bank
that you’re using. So they’re using these
loophole, this ILC in Utah, to plug into the
banking charter. So they’re getting
around banking laws. And then they’re saying, oh,
we’re going to disrupt banks. But it’s not a
solution to the poor. Fintech is this
like– who said it was, like, this bourgeois
solution, right? It’s basically like, what
would I want if I were poor? And the imagination goes
to, like, it’s just me with everything I have
but just less money. But that’s not what– but that’s not what
poverty is, right? Poverty is a fundamentally
different thing. It’s not just me
with less money. It’s a different world. And that’s what fintech
people don’t quite understand. I think. And that’s overgeneralizing. I’m sure there’s
some good people. AUDIENCE: Hi. I really liked the
picture you had of the money cycling among
the white people banks, and then just it siphoning out
of the black banking sector. And what it reminded
me of was, yesterday, when we were talking about– when Rana was talking
about money kind of in this loop in the financial
sector and just kind of getting stuck there. And I was like, well, this looks
like exactly the same thing as we were talking
about yesterday. And I’m wondering,
to what extent have you explored the
problems with black capitalism as being like a microcosm
of some of the problems with larger capitalism
in the financial sector? MEHRSA BARADAHAN: I haven’t. But that’s a really
good question. And then there’s so much
more work to be done here. I mean, honestly, when
I was writing this book, I just wanted to read a
book about black banking. So I asked my library, just
find me a book on black banking. And there’s, like, nothing. The last one was 1930. So I had to spend time
in the Nixon archives looking at this
black capitalism. Someone should have written
that book that is a historian. Like, I am pretending. So there’s a lot of
work– like, for you PhDs that are historians or
economists to do more work than we law people can cite. I’m not capable of
doing that kind of work. But I would love to
cite any of you who want to go deeper into this
and theorize it, or dig up some of the dirt.


  • Reply Paul Charles January 28, 2019 at 5:21 pm

    Check out Chuck Collins' report!! Also in the south whites would arbitrarily confiscate what little property/goods blacks owned at gunpoint, forcing them to sign over land, cars, mules etc as the law did not protect them!! Yet Trump expects them to sing the anthem and salute the flag!!

  • Reply Paul Charles January 28, 2019 at 5:45 pm

    Do you have to speak so fast?? Some modulation, pausing and respectful pathos/gravitas would be becoming!! Content is similar to the information found in the book "The Colour of Law"!!

  • Reply Paul Charles January 28, 2019 at 6:35 pm

    So basically the banks and the American government are the spawn of Satan and Alan Greenspan is his henchman!!

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