Government Already Has Tools Available

This article originally appeared in the New York Times on Oct. 1, 2013.

By Celeste Watkins-Hayes

Throughout much of the last century, federal, state and local governments as well as private lenders have created and perpetuated a two-tier credit market. Minority families often found themselves shut out of opportunities for credit for homes and businesses or were disproportionately exposed to financial products with less favorable rates and higher risk. Subprime mortgages and payday loans are contemporary incarnations of what we might call “easy but dangerous” credit, disproportionately exposing black and Hispanic borrowers to sky-high interest rates and near-certain loan default. As a country, we still struggle with the legacy of this racialized credit market and need to find ways to address the “lending deserts” within underserved communities, with an oversupply of risky financial products and an undersupply of stable ones.

Unfortunately, a proposal to address this issue through government-owned banks would likely confront great skepticism. In the current political climate, any attempt to create such institutions would almost surely be staunchly opposed as a "big government" measure, or they would be saddled with such watered-down goals that they would struggle to be effective from the start.

At the same time, according to the Pew Research Center, a majority of Americans (63 percent) still see the country’s economic system as quite insecure after the recent credit crisis, and many (69 percent) believe that the federal government has favored banks and financial institutions over consumers in the slow climb to an economic recovery. Even if lawmakers wanted to create a bank to lend to underserved communities, consumers might be skeptical. Asking them to put their limited resources in government-owned banks would require a vast campaign to gain the public’s trust and confidence.

But there are smaller, achievable steps that could have a huge impact. We can bolster the existing entities that have the potential to address lending deserts. The Community Reinvestment Act and other government interventions have challenged financial institutions to help meet the credit needs of the communities they serve, and the recently created Consumer Financial Protection Bureau has enormous potential to improve the regulation of mortgages, credit cards, student loans and other financial services for individuals. Qualified borrowers who have chosen not to pursue credit because they don’t trust the system or refuse to pay exorbitant interest rates, or those who have borrowed under unreasonable and predatory lending standards, could have a real opportunity to fully participate in our economic system. As a new institution without the history of racial discrimination and exclusion that has plagued many financial entities, the bureau has great potential to serve as a trusted intermediary between consumers and financial institutions.

- Celeste Watkins-Hayes is an associate professor of sociology and African American studies at Northwestern University.