Wednesday, June 02, 2010

My Poor Memphis

The New York Times ran a story earlier this week entitled "The New Poor: Blacks in Memphis Lose Decades of Gains," which painted a very grim picture of the recession's effects on African-Americans in Memphis. According to most demographers, Memphis will soon be the first metropolis in the U.S. with a predominantly black population, which means that our fair city is often looked to as a prognostic indicator for "black urban life." The NYT article descibes Memphis as a city in which the black middle-class was, up until very recently, on the steady rise. But the two major effects of the recent recession (unemployment and foreclosures) are disproportionately ravaging the black community, disproportionately when compared to white communities, and that is the real tragedy of this story. Memphis is not the only place in the country where this is happening; it's just the place where its happening is the hardest to deny.

A few weeks ago, our mayor (A.C. Wharton, Jr.) testified before Congress about the Reverse Redlining Lawsuit that the city of Memphis filed against Wells Fargo. "Reverse redlining" is a special variety of predatory lending, which has literally eviscerated black communities in Memphis, and which has its own racially-charged history. As you may recall, before Title VIII of the 1964 Civil Rights Act (a.k.a., the Fair Housing Act) was in effect, urban communities were starved for credit and denied loans for decades by "redlining" investment and lending practices. Banks, insurance companies, employers, even supermarkets literally drew a red line on a map around certain communities, most often racially determined, in which they would not invest. The Civil Rights Act of 1964, for the most part, outlawed redlining practices, which made possible the rise of a black middle-class in cities like Memphis over the last three decades, enabling blacks with access to homes, jobs and credit that translated into accumulable and, eventually, accumulated wealth. However, it now appears that all of that progress has been, or soon will be, reversed. The banks returned to their old tricks during the so-called housing "boom," this time with the more insidious practice of "reverse" redlining. Rather than targeting black communities for the denial of loans and credit, financial institutions literally flooded those "redlined" areas with exploitative loan products that have now drained residents of their wealth... and, significantly, drained the city of its progress.

Mayor Wharton called this the "changing face of discrimination," astutely linking the racist practice of reverse redlining to the racist history of redlining. If predatory lending is the chief culprit in our current recession, Wharton wants to make sure we all know that predation is not, and never has been, equally distributed. In his testimony to the U.S. Congressional Judiciary Subcommittee on the Constitution, Civil Rights and Civil Liberties, Wharton did not mince words when he stated:

Simply put, predatory lending is to this generation what 'no lending' to Blacks and Latinos was a generation before.

Although the NYT article did include a few remarks from Mayor Wharton, and although it did make mention of Memphis' lawsuit against Wells Fargo, the fact that the article is titled "The New Poor" indicates that (per usual) they have failed to connect the dots when it comes to race, class and the law. The "new poor" is not new. It refers to the same people, the same communities, who are made and kept poor in the same ways that they have been for the entire history of our country. Intentional blindness to the direct lineage that connects Jim Crow redlining to Obama-era reverse redlining is just another failure to see the big picture. Race continues to operate as the primary American filter through which all goods, privileges, rights and resources pass. Mayor Wharton implored Congress to connect ALL of the racial dots, rather than just the "cultural" ones, when he said: "For those who would say that the lawsuit we've filed is aligned with our city's history for 'singing the blues,' I assure you that this is not the case. We are not 'singing the blues'-- we are 'crying foul'."

Foul, indeed.


steventhomas said...

Interesting post. Was it Stuart Hall who said something along the lines of race being the modality through which class is experienced or lived? I can't remember the exact quote, that essentially agrees with your blog post.

I saw a similar study about Minnesota (where I live) about predatory-subprime lending targetting people of color. However, I think the old "no loan" structure still plays a role in this new predatory lending structure that you're talking about. The Minnesota study demonstrated that the more solid banks were more likely to deny a good loan to a person of color, even if that person had the same income and other qualifications as a white person. It was a bit of a scandal when the study was released. So, one thing that drives a lot of people of color towards the subprime loans and alternative lending markets is that they have more trouble getting good loans or are less likely to have wealthy family members who can co-sign a good loan.

Another factor is that property values are affected by race. So, white people can more likely count on their property value going up so long as they maintain an exclusively white neighborhood (e.g., white flight suburbs.) When people of color move in to the neighborhood (as we see in recent movie Gran Torino), the values go down, which of course affects the loan structure. So, again, as you so correctly point out, racism still plays a huge role in America's economy.

But qualifying what I just said, I suppose there are a multitude of other factors, including the "cultural." I think there is evidence that non-whites are more likely to invest in "visible" capital -- cars and houses -- in an effort to gain visible social status. And these investments are sometimes risky. This is cultural, but for sure it's a culture produced out of a long history racist social structures.

Meanwhile, I'm curious when Memphis became the first predominantly black population. I think Washington D.C. became majority black in the late 1950s.

Art Carden said...

I can see how Wharton's very tidy good guys/bad guys story is appealing to many, but I think reality is a lot more complex. Unfortunately, my view--that (1) credit expansion distorts prices and leads to an unsustainable pattern of investment and consumption decisions and (2) the distortions were magnified by regulations that privatized short-run profits and socialized long-run costs--is awfully short on good villains. When we get all this sorted out, I think we'll ultimately find that the policies people were celebrating for "making the American Dream of home ownership a reality" five and ten years ago are playing a leading role in this mess. I think race and class are definitely at play, but in a different (and more complex) way that doesn't lend itself to a blog comment. I don't think anyone has the full story yet, but here's some good nightstand reading on the housing crisis:

1. Steve Horwitz and Peter J. Boettke, >The House that Uncle Sam Built.

2. Stan J. Liebowitz, Anatomy of a Train Wreck.

3. Russ Roberts, Gambling with Other People's Money. Here's Russ on an EconTalk podcast with more.

Art Carden said...

Also, here are my notes from a talk I gave in October 2008 on the financial crisis with links. Steve Horwitz exonerates the CRA; I'm inclined to agree.

jlotz said...

@ Art - If I may add a wonky caveat or two, cheap credit has definitely been an issue in the foreclosure crisis, but you have to acknowledge that a substantial number of sub-prime products were pretty much designed to fail. This isn't the first time Wells Fargo has been accused of systematically targeting low income minority neighborhoods and preying on new borrowers' lack of knowledge and experience with loans (NYT did a similar story about Baltimore a few years ago There is plenty of evidence that a lot of lending companies talked borrowers into some obviously predatory loans as well as loans that were much pricier than borrowers could qualify for, actions that are generally legal but not all that ethical. But given the asymmetric information and lack of regulatory standards on adjustable rates, prepayment penalties, etc. on sub-prime products, I don't see how further deregulation would necessarily make for a better market for future homeowners, especially those with relatively few resources, networks or institutional wisdom about how credit markets and mortgage loans work.

Art Carden said...

@steventhomas: Interesting. How large was the effect, and how did the default rates compare across racial categories for approved loans? Most of the discrimination-in-lending studies I'm familiar with usually find that when people are more careful with the data, they find that the loans being asked for differ in important respects (riskier projects, etc).

@jlotz: Good points. Some quick thoughts as I'm hoping to put together a piece on this:

I don't think sub-prime products were "designed to fail"; they were designed to create a market for creatively-financed loans. There wouldn't necessarily have been a problem as long as housing prices kept rising. The need for a market for creatively-financed loans was due to the political goal of increasing home ownership, even at the expense of good financial stewardship. Indeed, the practices that are now called “predatory” were part and parcel of explicit policy goals aimed at increasing home ownership among the poor.

My experience getting a mortgage in 2007 convinced me that there are and have been a lot of people on both sides of the transaction who don't really know what they're doing. Asymmetric info problems are solved on one side by credit scoring and accounting for borrowers’ assets, liabilities, job security, and income prospects; on the other side, publicly-available financial statements allow borrowers to assess the banks with which they’re planning to do business (the FDIC “solves” this to a degree, but by creating other problems). The real problems are the misalignments between risk and reward.

First, Fannie and Freddie created a very liquid market for mortgage-backed securities. This in turn created an environment in which fast talkers could sucker people into risky mortgages that they could package and sell to someone else, knowing that the risk burden would ultimately fall on Fannie and Freddie (and ultimately, the taxpayers).

Second, risk can't be eliminated, and unfortunately the incentives were such that people didn't understand the risks they were taking. This doesn't necessarily mean they were swindled. Changing the incentives encourages more irresponsible behavior. Hence, people will make more bad decisions (a quick skim of this suggests that this is a problem for TBTF banks; here’s my friend Peter Leeson’s summary and review of Too Big to Fail).