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Aug 01 2011

Disparities redux: the face of today

So the last couple weeks I went on a bit of a binge focusing on the idea of disparities. My operational definition of the word is a difference in access or achievement that is not based on merit – not based on a person’s innate skills or talent that enable them to do something. I spoke first about gender disparities and how they might be hurting everyone. Then I looked at the origins of racial disparities, as well as how those disparities can persist across generations. I realize though that all of those articles I started with the presumption that you, my esteemed readers, agreed that disparities exist. While this is more than likely true, it is still sloppy blogging (if such a phrase makes any sense at all).

Luckily for me, I didn’t have to wait long for some hot-off-the-presses evidence pointing to not only the existence, but the magnitude of racial wealth disparities in the United States:

The median wealth of white households is 20 times that of black households and 18 times that of Hispanic households, according to a Pew Research Center analysis of newly available government data from 2009. These lopsided wealth ratios are the largest since the government began publishing such data a quarter century ago and roughly twice the size of the ratios that had prevailed between these three groups for the two decades prior to the Great Recession that ended in 2009.

The Pew Research analysis finds that, in percentage terms, the bursting of the housing market bubble in 2006 and the recession that followed from late 2007 to mid-2009 took a far greater toll on the wealth of minorities than whites. From 2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, compared with just 16% among white households.

So we’ve known about this particular disparity for a while. Black home ownership was at its highest level ever right before the crash. Reports starting coming in of so-called “predatory lending” wherein people whose credit didn’t qualify them for a home loan were targeted for sub-prime mortgages. The banks figured they could make money off of debt defaults, but it turns out you can’t actually just conjure money out of thin air and the whole thing (read: the economy) fell apart.

During the aftermath of all this, it became suggested that black first-time home owners were particularly targeted for these loans, even those whose credit was good enough for a regular mortgage. People who I trust to know about these things were saying that lenders were looking specifically for black borrowers, as they ‘fit the profile’. We may never know the extent to which systemic (and perhaps some overt) racism led to the preferential treatment ‘enjoyed’ by black borrowers, but we can be sure that they were disproportionately screwed over when the bubble burst.

Here’s the thing about home ownership: it’s the first way to build wealth. Wealth does not refer to simply how much income one has; rather, wealth refers to the ability of your money to work for itself. Someone who rents (like myself) must pay the cost of living in the home, and that money disappears and is gone. If you own the home you live in, you may still have to pay the mortgage each month, but most of that is money that you are paying yourself. As a result, your home accumulates its value as you pay off the loan (‘equity’). As you make improvements to the home, its resale value increases. This is not the case when you rent, so in a way your home generates money for you.

So if you start with a group that already has lower-than-average home ownership to begin with, and then loan them poisoned assets so that even those that could afford homes get screwed when the man behind the curtain is exposed, you make the disparity even wider. Add to that the fact that black families living in ‘black neighbourhoods’ being disproportionately loaned to means that the values of those neighbourhoods goes down more than in white neighbourhoods. This has a ripple effect to those black families who already owned their homes as the prices plummeted. Not only was the wealth of those who had made “bad decisions” (read: who were bamboozled by indecipherable contracts that not even the lenders fully understood) erased, but so too was the wealth of those who had played by the rules.

This happened everywhere, not just in black neighbourhoods. However, what this meant is that the people who were given those corrosive loans at a higher rate (black and brown people) were disproportionately affected by the bubble bursting. Whereas white communities insulated the victims of this loan fraud (as a result of low volumes of bad loans), the rush of bankruptcies and foreclosures destroyed black communities. The resulting wealth split made the problem of disparities even worse. Much worse than it has been in a long time:

So whether or not you believe that it was intentional malice or just an ‘accident’ of systemic racism, we see that predatory lending patterns has created a reality in which black and brown people saw their wealth, built up over generations, destroyed in the twinkling of an eye. Not because of laziness, not because of genetic inferiority, not because they didn’t have the work ethic to stop waiting for a government handout, but as the direct result of racism. Not the overt racism of their parents’ day, but the racism that I try my best to describe to you on these pages.

Anyone who would like to dispute whether or not racism is still a relevant problem in today’s “post-racial” society, or who thinks that the problems plaguing black people aren’t due to prejudicial attitudes about their skin colour, or who thinks that “individual responsibility” is the key to understanding the different realities faced by members of racial minority groups and the majority group… those people are now invited to suck it.

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3 comments

  1. 1
    G.Syme

    Sorry to miss the point entirely, but I’m curious how a bank makes money off debt defaults… can you enlighten me?

    That said/asked, you really hit it on the head this time. You’ve presented fairly irrefutable proof of racism and disparities in American society. I’m curious about the extent to which it exists in Canada (and Australia).

  2. 2
    Riptide

    Depends on what you mean by ‘bank’. Used to be that capital-investment banks and savings&loan banks were distinct entities–forcefully kept so by things like Glass-Steagall and other reforms built up over many rupturous banking failures in the 20th century (reforms which Shrub the Dumber helped to wipe away).

    Investment banks took bets on a new market of commodities called ‘credit default swaps’, wherein packages of credit were compiled, ultimately of various loans that savings banks made out to their customers. Basically, the investment bankers and Wall Street traders teamed up to bundle different loans into units to trade on a betting market. Certain bettors would bet on packages succeeding–in essence, agreeing to underwrite the loans in the packages in return for a piece of the profits when the loans were repaid.

    Others bet on these packages failing. They tried to get the ‘good’ bettors to absorb the risk, so that they could clean up when defaults happened.

    The main problem (but certainly not the only one) in this scheme is that the crediting agencies were getting hoodwinked, or letting themselves be do, into rating rotten packages with the best in the bundle. So many bad bundles were given AAA credit scores collectively on the strength of a few ‘good’ pieces in the package. This led to overconfidence in the entire process, with many, many people trying to cash in on the packages succeeding.

    Thus a few people well-placed to take advantage of defaults stood to clean up a lot of money when the game evaporated. And they got paid twice, from the ‘market adjustment’ itself and from the Bush White House shuffling TARP through Congress.

  3. 3
    Brian Lynchehaun

    Imagine I make a bet with you about something that I am pretty much guaranteed to fail doing (getting a PhD in Math within the next 2 years, for example). Then I make a second bet with you, for more than the original bet, that I will lose the first bet.

    Now, as a sane human being, you’d say “screw you Brian, you’ll just intentionally screw the pooch on the first one, and then win more money than you lose”.

    But A) banks aren’t staffed by sane human(e) beings, and B) while the bank is making those two bets, it’s making them with two different folk: one is the individual and the second is society. So a huge portion of the individuals lost their homes, and then the banks won lots of money from society as a whole.

    That’s how banks make money on debt defaults.

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