With the Obama administration's hard-fought passage of financial reform, Americans are waiting with bated breath and open wallets to see if their windfall is on the horizon. While people of all races have struggled in the past few years, black Americans have been disproportionately affected by the recent economic collapse, and many are eager to operate under a policy that claims it can help close our nation's skyrocketing white-black wealth gap.
But can the Dodd-Frank Wall Street Reform and Consumer Protection Act really weaken hundreds of years of systemic barriers against African-American wealth? The Root spoke with Dalton Conley, dean of social sciences at New York University and a research associate at the National Bureau of Economic Research, to help illuminate the subject.
The Root: One of the major mechanisms in the financial reform bill is the establishment of a Consumer Financial Protection Board (CFPB). Given the failure of the Securities and Exchange Commission to rein in financial institutions, can we really expect the CFPB to be effective?
Dalton Conley: As fast as the government or activists or whoever can come up with ways to protect those who are financially weaker, financial predators will think of new ways to extract their money from them. There are a lot of very straightforward things in the new bill, like putting into credit card applications information about how long it's going to take to pay off your credit card if you pay only the minimum balance each month. That information is also going to be in a bigger font size, making it more explicit. And sure, that might do something. But you can bet that there's going to be new ways the finance industry finds to make their profits. And if any of those protection measures do work, the consequence is going to be that it's going to be harder for low-income people to get credit because they'll be more attuned to the risks and therefore, less profitable [customers].
TR: We've read that banks, which will be forced to cap user fees like overdraft charges under the new bill, might simply drop customers who aren't profitable once those fees can't be collected. Is that a real risk?
DC: That's right [it is]. And whatever fees are not capped are going to shoot up, be they ATM fees or whatever. To be optimistic, it could promote in the industry an incredible proliferation of newly innovative ways to provide small account holders services in a more efficient way. So you might have something like accounts that have a debit card, but not an ATM withdrawal option. They might really try to keep costs down. That would be the ideal outcome, but I fear that there's going to be more churning of small account holders.
TR: Several months before the passage of financial reform a posting on the White House blog said that payday loan stores, which are notoriously predatory and detrimental to minority communities, ''play an important role in the market.'' Is that true?
DC: I think what makes them say that is that there are people who find it more economically rational to use payday loans than to have a bank account, especially with the fees. There have been studies showing that makes sense for some people. Of course, I'm not sure that in an ideal world that's good. If we're redesigning the system—as we supposedly are—having unbanked people who rely on payday loans is a bad solution. If there really is a sustainable model for banks to provide people on the fringes of the financial system reasonable, low-cost accounts involving credit, then, ideally, we'd want to put the payday lenders out of business.
DC: In theory, prepaid debit cards are great because they're a way people can control spending and what they're paying. But when they're laced with hidden fees—as they often are—you've got a problem. The biggest hidden fee is that people almost never spend their prepaid debits down to zero. So the companies then take that cash and pocket it. For instance, if you have a $100 debit card and you buy something that costs $92.98, the card will then turn down any transaction over $7.02. If you can't spend it down, what the company does then is keep that seven bucks, along with whatever fees they charged you to use the card in the first place. All these things are good in theory, but it's how the laws structure the market that can be bad. I would also say that what we need is more competition in those markets. Visa and MasterCard appear to have an incredible dominance over that market. I know other companies like Discover and American Express have tried to penetrate that market, but it's been difficult.
TR: Is financial regulation really going to change things?
DC: I think it's always going to be the case that the rich are going to get richer and the poor are going to get poorer. And yes, you can slow down that process—and financial regulation will help slow that process—but everything is a double-edged sword. If we're more cautious in the credit markets, it's going to be harder for minority businesses to get loans in the inner city, and it's going to be harder for first-time home buyers. On the other hand, I don't think the regulations themselves are going to really dent the asset gap. I think you need something more proactive. You need some much more dramatic policy endeavor if you actually want to reduce it, but this may help reduce it in some way.
TR: What sort of ''dramatic policy endeavor'' would you enact to close the black-white wealth gap?
DC: I would do something that really fosters savings among low-wealth folks, regardless of race. That will inherently—because of the wide distribution—reduce the black-white gap, while also reducing low-wealth Hispanics and low-wealth whites. I would provide some sort of major endowment at birth that all Americans get, say $10,000—and then a lifetime savings matching policy. For low-income folks, they'd get a very high match, maybe two to one. For people further up the ladder, they'd get no match.
DC: Has this type of policy worked anywhere else?
The British had it, though their new government just got rid of it. They had Blair's baby bonds, where every kid got ₤500 at birth and then another ₤500 or ₤1,000 when they turned age five. Parents could then contribute to it and the government would match it. They also had something called the Saving Gateway that was a tax-free savings account for all Brits. Both those policies just got canceled by the Cameron-Clegg government, which is really unfortunate, because none of the kids are old enough to redeem them to go to college or whatnot, so we have no idea if they would have worked.
TR: Is the only answer real, unvarnished reparations?
DC: The most explicit way to take care of the black-white wealth gap is reparations, but I don't see that as politically feasible. So I think the way to do things is to make sure we're racially progressive but through color-neutral mechanisms. If we address things that way, it would inherently help African Americans disproportionately without ever having to be explicit, because the disparity is so great; anything you do that's slanted toward low-wealth households is going to favor black households.
Cord Jefferson is a staff writer for The Root. Follow him on Twitter.