The breathtaking collapse of American financial institutions has many hearing echoes of Black Tuesday and the Great Depression. Beneath the clamoring comparisons lies a silent truth about the role racism played in bringing our financial system to its knees.
During the 1930s, the federal government responded to the national financial crisis by creating the Federal Housing Administration and the Federal National Mortgage Association as part of a scheme to build a brave new real estate economy that would pave the way to future prosperity. These agencies gave birth to the modern mortgage industry, introducing the low down payment and the 30-year mortgage that made homeownership available to many Americans for the first time in history.
What few today remember is that one of the government's central goals in undertaking mortgage market reform was to segregate American cities by race. As the insurer of much of the national mortgage industry, the FHA fixated obsessively on fears that racial integration would harm real estate values and leave the government responsible for bailing out legions of failed loans. The agency mapped the racial composition of 250 American cities and automatically color-coded predominantly African-American and mixed-race neighborhoods red, refusing to insure loans in those areas (and creating a practice known as "redlining.") This guaranteed that banks, which desperately needed federal insurance to do business during the Depression, would not offer loans to people of color or to anyone living in integrated neighborhoods.
Nationally mandated FHA appraisal forms went so far as to require appraisers to determine the probability of a "Negro invasion" of the neighborhood where a loan was being made. The agency also required insured homeowners to attach restrictive covenants to their deeds that prohibited the sale of their home to a person of another race.
Backed by federal insurance, white suburban neighborhoods grew explosively, while black and integrated neighborhoods spiraled into permanent, localized depressions. Since banks would not lend in these areas, real estate values collapsed. Local economies and public school systems dependent on property tax revenue soon followed.
These neighborhoods lay isolated from the mainstream economy for decades until voracious investors in the 1990s rediscovered them as "emerging markets" whose pent-up demand for homeownership could be exploited for eye-popping profit. Like a slow-motion Hurricane Katrina, a torrent of subprime lenders, goaded by Wall Street investors, devastated inner city neighborhoods by stripping out billions of dollars of home equity annually in exorbitant loan fees and interest payments from predominantly black and Latino borrowers, many of whom qualified for prime loans. Meanwhile, federal regulators aggressively blocked state governments from policing the abuse of their citizens and allowed the crisis to escalate.
Wall Street Street's apologists have tried to blame the subprime crisis on the Community Reinvestment Act, Congress' tepid attempt in 1977 to atone for the FHA's sins. This argument, of course, is completely ludicrous, since the vast majority of subprime loans were made by institutions that were not covered by CRA. Wall Street and old-fashioned greed drove lenders to offer subprime loans, not the federal government.
The bailout legislation Congress is struggling to pass proposes using nearly a trillion dollars of taxpayer money to rescue the institutions that created this mess, but has said almost nothing about holding them accountable for destroying millions of lives and jeopardizing the foundation of our economy.
We must demand a federal investigation into the massive amount of mortgage fraud and predatory lending abuse that lies at the root of this crisis, and those responsible in the banking industry must be held accountable.
Finally, we ignore the lesson of this history at our own peril. A society that tolerates structural economic exclusion and inequality will ultimately fail. Our sustainability as a country depends on our commitment to building an inclusive, equitable economy that heals the scars of our racial legacy and gives everyone a fair chance to prosper.
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John Kimble, a native of New Orleans, is the author of "Insuring Inequality: The Role of the Federal Housing Administration in the Urban Ghettoization of African Americans." He can be reached at firstname.lastname@example.org.