The Great Recession in Black Wealth

Published on ZNet, by Jeannette Wicks-Lim, February 17, 2012.

The Great Recession produced the largest setback in racial wealth equality in the United States over the last quarter century. In 2009 the average white household’s wealth was twenty times that of the average black household, nearly double that in previous years, according to a 2011 report by the Pew Research Center.  

Driving this surge in inequality is a devastating drop in black wealth. The typical black household in 2009 was left with less wealth than at any time since 1984, after correcting for inflation … //

… Second, mortgage brokers and lenders marketed subprime mortgages specifically to black households. Subprime mortgages are high-interest loans that are supposed to increase access to home financing for risky borrowers—those with a shaky credit history or low income. But these high-cost loans were disproportionately peddled to black households, even to those that could qualify for conventional loans. One study estimated that in 2007 nearly double the share of upper-income black households (54%) had high-cost mortgages compared to low-income white households (28%).

Subprime mortgages drain away wealth through high fees and interest payments. Worse, predatory lending practices disguise the high-cost of these loans with a “honeymoon” period of low payments. Payments then shoot up, often to unmanageable levels that lead to default and foreclosure, wiping out a family’s home-equity wealth. In 2006, Mike Calhoun, president of the Center for Responsible Lending, predicted that the surge of subprime lending within the black community would “…likely be the largest loss of African-American wealth that we have ever seen, wiping out a generation of home wealth building.” We now know how prescient his prediction was.

To reverse the rise in racial wealth inequality, we need policies that specifically build wealth among black households. Economists William Darity of Duke University and Darrick Hamilton of The New School propose one possible—and politically-viable—strategy: a wealth-means-tested “baby bonds” program. This policy stops short of being a reparations policy, but still disproportionately transfers wealth to black communities. Federally-managed, interest-bearing trusts would be given to the newborns of asset-poor families, and could be as large as $50,000 to $60,000 for the child of the most asset-poor families. When these children reach age 18, they would be able to use the funds for a down payment on a house, to pay tuition, or to start a business. Darity and Hamilton estimate such a program would cost roughly $60 billion per year. Letting the Bush-era tax cuts expire for the top 1% of income earners would more than cover this cost. (full text and graphic).

(Jeannette Wicks-Lim is an assistant research professor at the Political Economy Research Institute PERI, UMass-Amherst).

Link: Interview with Jeannette Wicks-Lim, February 8 / 2012.

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