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

by Mehrsa Baradaran

Capitalist theory was even used to fight basic antidiscrimination laws in Milton Friedman’s foundational 1962 book Capitalism and Freedom. The intellectual father of neoliberalism opposed civil rights laws as a violation free-market capitalism. He decried discrimination as a matter of bad taste, but said that antidiscrimination laws were an “interference with the freedom of individuals to enter into voluntary contracts with one another.”200 He compared laws prohibiting discrimination to laws requiring discrimination, such as the infamous Nuremberg laws—it was all unjustified government intervention. Friedman believed that markets would themselves root out discrimination because it was costly and inefficient.

President Carter appointed more African Americans to federal offices than any president before him, but he had no coherent or visible message on black poverty or civil rights.

When Louisiana Governor Mike Foster signed an executive order eliminating affirmative action in his state, he said, “King sort of believed like I do. I can’t find anywhere in his writings that he wanted reverse discrimination.”51 That was not what King had believed. In Where Do We Go from Here, King had said, “A society that has done something special against the Negro for hundreds of years must now do something special for him.”

A longer historical view reveals that the reason the ghetto does not yield profitable loans is due to a history of segregation—segregation that was enacted through lending discrimination perpetuated by the very firms now being asked to mend the gap.

With the firmly established myth that equality had finally been achieved, black poverty and crime could only be explained as a sign of moral failure, and the only acceptable response to the failure to rise out of the ghetto was tough love and forceful containment. While policymakers were celebrating the triumph of equality and capitalism, the invisible hand of the free market was actually pulling apart and increasing the opportunity and wealth gap between black and white.141

By 2015 43 percent of Republicans believed the president was a Muslim.

Today, black families have an average net wealth of $11,000 compared to a white family’s average of $141,900. Pew data reveals that white families have thirteen times more wealth than black families.20 The wealth gap exists at every income and education level. On average, white families with college degrees have over $300,000 more wealth than black families with college degrees. A third of black families have no assets at all.21 Moreover, studies reveal that the gap is accelerating—over the last thirty years, the average wealth of white families has grown at three times the rate for average black families.22

The perpetuation of poverty is stunning—75 percent of black children who grow up in families in the bottom wealth category remain in that same category as adults.24 A 2013 study found that for white families, every additional dollar they earn in income leads to $5.19 in wealth. For black families, each dollar creates only sixty-nine cents in total wealth.25 This is why the wealth gap between blacks and whites can continue to grow even when de jure discrimination ended decades ago.

Today, one in three black children grows up in poverty compared to one out of ten white children. One out of five black children under the age of five grow up in extreme poverty.39

The poor are actually much more careful with their money than the wealthy. For example, customers leaving a grocery store were asked about the price of certain purchases. The majority of middle-class customers could not recall the amount they had just spent or how much they had spent on items such as toothpaste. The poor overwhelmingly got it right. This undercuts the premise that the poor need financial education so that they can pay attention to where they are spending their money.

In reality, blacks save an average of 11 percent of their annual income while whites save only 10 percent.43 The idea of blacks spending frivolously while whites save their pennies is a meaningless, damaging, and sadly persistent stereotype.

The American tax code distributes wealth toward homeowners because the most significant tax deductions for the middle class are related to mortgage interest deductions. These tax benefits cost the government over $130 billion a year, and their benefits flow to the wealthiest 20 percent of Americans. This redistribution of wealth operates as a significant disadvantage to blacks, who have much lower rates of homeownership than whites. Over 70 percent of white families but only 40 percent of blacks own homes, according to the 2016 census.44 Meanwhile, welfare, affordable housing subsidies, and other first-time homeowner initiatives have been gradually cut over the last decades.

black families earning $75,000 a year typically live in poorer neighborhoods than white Americans earning $40,000.50

The Wall Street Journal reported that more than 50 percent of borrowers who were sold subprime loans could have qualified for prime loans. At the peak of the subprime market in 2006, 61 percent of borrowers were steered toward subprime, which meant that “a significant number of borrowers with top-notch credit signed up for expensive subprime loans.”74 Mortgage brokers made more money for convincing—duping—borrowers into taking out costlier subprime loans than the prime loans that they were eligible for and could more easily afford. The higher the interest paid by borrowers, the bigger the bonus received by the mortgage broker.75

Unsurprisingly, black college graduates owe an average of $53,000 more than their white counterparts in student debt. Blacks have to borrow more for college and have to carry greater debt several years after graduation—usually from two to three times the amount of white graduates. Black students default on student debt at a rate five times higher than white or Asian graduates and because student loans cannot be discharged in bankruptcy, this debt is carried until it is paid off.100

The clear message that emerges from the history of black banks is that relying on these banks to do the work of achieving wealth equality without changing the economic environment in which they operate is unfair, cynical, and fruitless. Insofar as there is segregation and widespread poverty in the black community, banks that exclusively serve this community cannot be successful. The black community needs banks to grow and prosper, but the banks cannot achieve that growth and prosperity alone. Self-help microfinance cannot overcome macro inequality and systemic racism. Policymakers have been placing the weight and responsibility of centuries of wealth inequality on these tiny economic engines, and the results have been failure and frustration.

Banks reflect the economic conditions of a community; they cannot change them.

In 1894, a London newspaper predicted that “in 50 years, every street in London will be buried under nine feet of manure.” This dire outcome did not consider that horses would not be the primary mode of transportation in fifty years and that the automobile, an invention that was right around the corner, would transform life. Once people are motivated to deal with the wealth gap, radical solutions may emerge. There is no reason to believe that the future is just more horse manure.

In 1958, only 4 percent of Americans approved of interracial marriage. By 2013 a Gallup poll found that 87 percent of Americans approve.