The financial crisis is one of arrogance. “This is a crisis of ‘I know more than you know, trust me,’” said Stella Adams, director of curriculum at the Patricia Roberts Harris National Fair Housing Training Academy in Washington, D.C.
Adams remembers when she was at a meeting with the Board of Governors of the Federal Reserve System before the crisis really broke.
Her colleague read a U.S. Securities and Exchange Commission report where a predatory lender company indicated that 50 percent of its loans were about to go bad.
One Federal Reserve governor told her not to worry. The risk was too spread out.
He said there was no chance that the crashing subprime loans, loans with high-interest rates that are offered people with low credit scores, would impact the vastness of the macro economy.
Adams said she replied, “But the subprime market has no history to which you can rely on.”
Another governor came up to her at lunch and told her that a trillion dollars is not a lot of money.
He used the words: “Trust us.”
Of course, now the country finds itself in critical financial trouble in the wake of meltdowns in the subprime loan market and mortgage-based securities.
“We have a real opportunity in America right now to build a stronger America or turn America into a Third World country,” Adams said. “We are at a crossroad.”
At the Regional Fair Housing Training Conference on April 29, Adams focused her keynote speech on understanding a pattern of crisis. In order to create true financial reform, our leaders must first acknowledge and understand that this is not a new situation.
In the 1930s, the Great Depression started with the housing bubble, she said. The Fair Housing Act came out of the crisis, and the country reestablished its banking system. Subprime products have been around that long.
“It’s not a bad product, it’s just been given to the wrong people,” she said.
Those same products are not legally sold to the wealthy. By law, elderly billionaire widows cannot be sold certain financial products, she said. But for homeowners in Middle America, they are on their own. She asked the audience: Why are there not similar laws for low-income widows?
One man created such policies that have governed our financial system since the 1930s and encourage segregated neighborhoods, she said: Frederick Babcock, the father of appraisals.
“He said the value of property is the same except for one thing – the race of the occupant,” Adams said. “He said the Negro population is not capable of maintaining property.”
Hence, appraisers had the right to break down house value by race.
Babcock had a list, she said. Northern Europeans, except for the Irish, were in the first tier. Eastern Europeans were in the second category. South Europeans were third, with Greeks at the bottom.
Then there were others: including blacks, Latinos and Native Americans.
His decisions formed a base structure for how neighborhoods look today.
“This is why we have ghettos,” she said. “It was encouraged by federal policy, by one man sitting behind one desk.”
‘A new set of understanding’
Now the country’s leaders are faced with another financial reform.
“And we need to loosen up the constraints,” she said.
Today, affluent African Americans are twice as likely as low-income white men to have subprime loans, according to the National Community Reinvestment Coalition’s “Income is No Shield Against Racial Differences in Lending” report. Today, to get a new loan, the average credit score minimum is at 740, and the average African American has a credit score of 620, according to the report.
Our financial system needs to increase its focus on savings, she said. Banks should not run credit-score reports on saving accounts. They should not run debits before deposits.
“Invest in your customers, and they will invest in you,” she said.
Yet somehow, when the crisis hit, the higher the levels of unemployment and the higher the credit scores got. Now let’s see how this works, she said.
She said Wall Street fraud created a financial crisis. Then people bailed out the banks. The banks restricted loans, so then small businesses couldn’t make payroll, and these employers laid off workers. Workers couldn’t pay bills on time, so their credit scores dropped, which further damaged their financial prospects
“I see times are tight, so I go to Wal-Mart and Target,” she said. “My credit card cuts my limit because my spending habits have changed. I’m punished for trying to save. You can’t win and regain.”
The old assumptions are not going to work, she said. Typically, when students graduate from college, they get a job and buy a house. But now they have such high debt that most graduates are not buying. Senior citizens lost 20 percent of their retirement funds in the recession, so they aren’t buying homes either.
“We are the only country in the world that doesn’t invest in the brightest minds,” she said. “We turn the brightest minds into indentured servants. We need a new set of understanding.”
