The Color of Money: Black Banks and the Racial Wealth Gap

by Mehrsa Baradaran

to actual equality.

“For it is obvious,” stated King, “that if a man is entering the starting line in a race three hundred years after another man, the first would have to perform some impossible feat in order to catch up with his fellow runner.”

Instead of honoring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked “insufficient funds.”

Laws set in motion a century earlier had created a black ghetto economy that was uniquely ruinous. Black poverty, having been created by economic exclusion and segregation, was distinct from white poverty. The urban ghettos were zones with fewer public resources such as quality schools, roads, hospitals, universities, and infrastructure. In fact, even the urban renewal programs that upgraded and revived America’s cities in the 1960s did so at the expense of the black population. James Baldwin referred to “urban renewal” programs as “negro removal,” for the effect was that highways and roads built through ghettos pushed and packed black residents into increasingly overcrowded and under-resourced neighborhoods.25

The money-pit economy of the ghetto meant that black consumers paid much more for everything than those living just across the color line.

These informal neighborhood transactions often entailed repossession, wage garnishments, court judgments, and even shakedowns by lenders, all of which were unimaginable in the suburbs. The loss of a job could lead to default on a furniture loan, but a missed payment could also lead to loss of a job, because it was common for an employer to fire an employee whose wages were garnished in order to avoid the hassle.55 There were many more court judgments in the ghetto than in the suburbs, which meant that law enforcement and the court system were a part of the credit system for blacks.56 Repo men, courts, lawyers, police, bankruptcy—all from buying a refrigerator and a television set. These lenders were the very face of exploitation, humiliation, shame, and injustice. So it is not surprising that they were the first targets of the violence.

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Lenders soon found another fairly obvious way to avoid lending to blacks after these laws were imposed—they used zip codes as a proxy for race. Zip codes were perfect indicators of a community’s racial and economic makeup because segregation had almost perfectly correlated geography and race.75

The Office of Economic Opportunity (OEO) would launch job-training programs, food and income assistance, and the early childhood program Head Start. However, from the start, these programs were geared toward charity and education as opposed to control, power, or building capital.

In other words, black poverty has been viewed as a moral failing, whereas white poverty had been viewed as a systemic problem.

Therefore, once welfare came to be associated with black poverty, it was delegitimized.83

Not only did these programs not actually alleviate black poverty, but they have since been maligned by conservatives as the cause of black poverty.

“You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, ‘you are free to compete with all the others,’ and still justly believe that you have been completely fair.”

The final report determined that the riots stemmed from poverty, racism, inequality, and other social ills, but that the underlying cause was segregation.

We are oppressed because we are black—not because we are lazy, not because we’re stupid (and got good rhythm), but because we’re black.”120

Yes, the “whites only” signs were now gone and employers could no longer legally discriminate based on race, but many still suffered from unemployment, dilapidated housing, and intractable poverty. The civil rights movement held America to its democratic promise and undoubtedly opened opportunities for the black community, but these initial successes produced significant obstacles to future progress.

Not only did Nixon find his way through the race minefield; he forged a path that many politicians after him would follow. The strategy included opposing all forms of legal race discrimination while rejecting any government effort at integration.

Johnson may have been the master of the Senate, but Nixon was the master of political sleight of hand.

The fine print was that the bridge-building would be the sole responsibility of the black community. It placed the “black problem” in the

hands of black entrepreneurs to fix with a little federal aid.

He said that “Nixon should support the concept of community control of schools, welfare, sanitation, fire, police, hospitals, and all other institutions operating in the so-called ‘ghettos.’ ”8 But Nixon never intended to give blacks control of their community institutions, but rather, ownership of the problem of poverty.

In his 1963 State of the State address as governor of Michigan, he had pronounced that the state’s “most urgent human rights problem is racial discrimination—in housing, public accommodations, education, administration of justice, and employment.”17

Nixon’s “southern strategy” was effective because he used race as a wedge issue without actually talking about race. For example, by associating crime with blackness and promising “law and order,” he could signal allegiance to white

voters fearful of blacks without sounding like a racist.

It was more vulnerable than black capitalism because it cost whites more, and it would become the epicenter of a white backlash that claimed it was “reverse discrimination.”

Mafia for venture capital funding. One estimate held that 25 percent of black business was financed by the Mafia.141

The same forces of discrimination and poverty that had led to the creation of these banks would continue to be their main obstacle.

King felt compelled to respond: “You don’t have to go to Karl Marx to learn how to be a revolutionary. I didn’t get my inspiration from Karl Marx; I got it from a man named Jesus.”

Nixon followed suit by releasing fear-stoking radio ads featuring violence, with a promise that “we shall have order in the United States.” As John Ehrlichman, special counsel to Nixon, admitted,

“that subliminal appeal to the anti-black voter was always present in Nixon’s statements and speeches.”

No sooner had the complicated, overdue, and incomplete racial turmoil of the civil rights era subsided than a rewriting of its history began. The story was that the civil rights laws had permanently altered race relations in America, dividing history into a racist past and a color-blind present. Civil rights was a fait accompli, justice had finally been achieved, and America’s institutions were at last only concerned with the “content of one’s character.”

On the campaign trail and as president, Jimmy Carter portrayed the country as postracial. He chastised his Democratic primary opponent, Jesse Jackson, for overemphasizing racial problems, which he referred to as “an issue that’s already divided the people,” yet he enthusiastically embraced the once-divisive leader of the previous era, stating “I see an America in which Martin Luther King’s dream is our national dream.”1 President Ronald Reagan also harshly denounced racism and embraced King’s dream. When Reagan made King’s birthday a national holiday in 1983, he announced, “We’ve made historic strides since Rosa Parks refused to go to the back of the bus. As a democratic people, we can take pride in the knowledge that we Americans recognized a grave injustice and took action to correct it.”2 Yet he had consistently maintained opposition to civil rights laws because he believed them to be unnecessary government intrusions into private markets.3

Black poverty came to be seen as a direct result of a culture that lacked responsibility, work ethic, and “family values.”

President Reagan attacked welfare spending, characterizing it as tax dollars being spent on “welfare queens” feasting on T-bone steak while hardworking Americans “were standing in the checkout line with [their] package of hamburgers.” In railing against welfare, Reagan used the example of a particular black female fraudster who had snatched unearned privileges by exploiting the welfare system at the expense of honest taxpayers. This was an inaccurate picture of welfare, as whites received the large majority of welfare benefits and welfare fraud was rare. However, the depiction of the black population as riddled with crime and drugs, unwilling to work, and living comfortably off government largesse had remarkable durability.5

In 1982, Reagan initiated the War on Drugs, even though drugs had not yet registered as a perceived public problem.7 Even the staunchest advocates of the drug war now admit that it was unfairly skewed to impose the harshest prison sentences on black drug criminals rather than white ones, and it resulted in a generational devastation of the lives of young black men.8

Crime, drugs, and gang violence eventually enveloped the ghetto. Segregation, poverty, and a distrust of police led to increased crime, which led to further marginalization, poverty, and even more policing. According to Jill Leovy’s study of black crime, Ghettoside, high rates of murder among black men are a by-product of poverty, a history of distrust of the white justice system, and especially of segregation.

Black men viewed the American legal system with suspicion, and so extralegal violence filled the void and ordered the lives of young black men;

Instead of dealing with the complex set of forces causing black crime, the state response was to contain it, lock it up, and demonize black criminals.

By the year 2000, almost 800,000 black men were in prison, compared to 600,000 who were in college.

Segregation, white flight, and declining home values continued to hamper black families’ ability to grow wealth.22 In 1984, black middle-class families had only twenty cents of wealth for every dollar of wealth held by white middle-class families.23

Half of black children were growing up in poverty. Wherever poverty was concentrated, education was subpar, and crime replaced legitimate institutions.

While de jure...

was now illegal, economic forces set in motion by years of segregation and discrimination were still perpetuating black disadvantage. But as for targeted race-bas...

King had said, “A society that has done something special against the Negro for hundreds of years must now do something special for him.”52

Subprime borrowers were riskier borrowers, either because they had fewer assets, lower credit score, or lower incomes. But in finance, higher risk is rewarded with higher yield, so mortgage brokers made even higher premiums from subprime loans.

So they went looking for

a group of potential borrowers who had heretofore been deemed too risky. And they found ...

The flip side of deprivation has always bee...

Some of these mortgage interest rates—34 percent APR with fees and balloon payments—were in loan shark territory.108

Whites systematically received lower interest rates and longer