Research Findings

How credit matters for racial and economic justice

October 22, 2020

When Donald Trump warned voters that Senator Corey Booker might someday obliterate the suburbs by overseeing a massive buildup of public housing there, we all knew exactly what he meant. His words, like those of countless politicians before him, were carefully chosen to drum up white resentment and backlash against racial minorities.

He intuited that an easy way to do so was to invoke the myth of a federal government that abused its power to gratify minorities at the expense of white families, especially by forcing racial desegregation. The irony, however, is that the federal government today plays a relatively small role in the provision of housing for low-income renters, hemmed in largely by the same forces of white resentment and backlash that Trump sought to stir up.

Meanwhile, another species of government increasingly fills the void: state-level housing finance agencies (HFAs). These agencies account for more than $500 billion in financing for approximately 8 million low-rent housing properties, which they do mainly by issuing low-cost mortgage credit to affordable housing developers and administering key federal housing programs like Section 8 and the Low-Income Housing Tax Credit.

But unlike the federal housing agencies that Corey Booker would oversee in Trump’s racist nightmares, HFAs continue to fly under the public radar, unknown to all but a relatively small network of insiders. In a society where the racial stigma and hypervisibility of federal housing programs vastly outweighs the miniscule amount of public resources that we spend on them, HFAs curiously have seldom attracted controversy.

In a recent article, I argue that one reason for this lies in the way these agencies communicate messages about the state—and just as importantly, the market—to the general public. Despite their aggressive use of tax exemption and taxpayer-funded reserves to raise capital from private bondholders, HFAs fervently insist that they are “self-supporting enterprises,” and that their policies and practices stimulate market forces but “don’t rely on the taxpayers to fund their operations.” Even more, HFA staff and officials ascribe these allegedly superior qualities to the agencies’ deep intertwinement with the financial sector.  

My research examines the rise of HFAs in the wake of federal efforts to address redlining and expand credit for affordable housing production in the 1960s. Policy makers initiated these anti-redlining efforts in response to a so-called “urban crisis” gripping American cities, most visible in the disinvested housing conditions experienced in communities of color. But the credit expansion inadvertently gave rise to HFAs, which played a key role in transforming low-rent housing into a financial market commodity. This story offers three basic insights into credit as a battleground for racial and economic justice in American society.

Credit Expansion is a Longstanding Tool of Economic Racism

As highlighted in recent work by sociologists, contemporary politics increasingly centers on credit—how it gets allocated, to whom, and under what terms. Crucial to this discussion is an understanding of credit expansion as a tool of economic racism.

American policy makers, especially during moments of crisis, have historically expanded credit to make or reshape the markets that define capitalism. But credit expansions have mainly targeted and benefited white Americans. This legacy underscores what I call the constitutive whiteness of credit: how racial meanings inform beliefs and assumptions about creditworthiness in ways that valorize whiteness and stigmatize blackness.

Capitalism therefore works differently for different populations. For whites, “markets” often entail generous government support administered indirectly to allow beneficiaries to feel economically self-sufficient. For marginalized groups, however, “markets” mean you are truly on your own. What was novel about the urban crisis era was that policy makers felt unusually compelled to address housing problems in communities of color—fearing riots and black unrest—so the typical neglect wouldn’t suffice this time around.

Credit Expansion Increasingly Targets Marginalized Groups

The 1960s marked a turning point where policy makers increasingly adopted credit expansion—and the language of markets more generally—in their design of policies aimed at marginalized groups, especially communities of color. Much of this “neoliberal” experimentation involved reforms that dismantled programs and downsized safety net funding.

But some of it created new programs and state capacities. In an unprecedented move, President Lyndon B. Johnson in 1968 responded to the urban crisis by signing a bill that authorized $50 billion in credit for production of homes for low-income residents, including renters. The bill reflected Johnson’s realization, at the height of backlash against public housing, that any program that directly and openly harnessed state power would inevitably stoke intense white outrage and ultimately fail. Directed at federal housing agencies, the bill inadvertently encouraged state-level officials to establish their own HFAs to share in administering the programs.

The hope was that credit expansion, as a way of mobilizing the state indirectly through markets, could be detached from its racist legacy and repurposed toward racial equity. In this way, the bill anticipated later initiatives such as the Community Reinvestment Act, and Clinton’s National Homeownership Strategy.

Credit Expansion Gives New Meaning to Marginality

Ultimately, this story highlights a sobering reality: while credit expansion remains a fundamentally racist tool of economic governance, it is also an increasingly pivotal thread in the safety net for marginalized groups and focal point in struggles for racial and economic justice. Many studies examine the vilification of welfare recipients, but the recent experimentation with making markets for marginalized groups sheds light on the shifting politics of marginality within the realities and limits of American capitalism. 

On the one hand, policy makers never considered publicly framing the 1960s expansion of credit to marginalized groups as serving the broader civic good, as they had done so in their prior efforts targeting suburban homeowners. Rather, they imagined it as a solution designed for a fundamentally un-creditworthy population—poor black renters—thereby legitimizing biases about who merits credit and deserves help participating in markets.

On the other hand, the alternative paths chosen by policy makers were also deeply flawed. Federal housing agencies directly challenged the injustice of redlining and advocated for redistributing credit into disinvested areas. But they consequently faced a massive wave of white backlash that ultimately killed the credit expansion less than five years later, as many whites charged that it wasted public money and rewarded black dependence on the state.  

HFAs took a different, more subversive path. Rather than directly challenging redlining, these agencies sought to convince the public that low-end rental housing paid for itself, relying heavily on convoluted financial engineering practices such as securitization and arbitrage, and legal tricks that disguised their use of public money.

Consequently, HFAs largely evaded white backlash, produced a significant amount of housing for black renters, and garnered unparalleled influence within the field of credit provision. But HFAs did so mainly by empowering financial markets to steer the direction of housing policy. For HFAs, the imperative to “maintain consistently high credit ratings, ranging from A to AAA,” supplants public deliberation and oversight.

In other words, the same qualities that shielded HFAs from racial controversy further entrenched finance’s political power. Ultimately, HFAs played a key role in creating the paradoxical world of inequality exposed by the subprime crisis: where marginalized groups are increasingly the target of credit expansion, but still perpetually stigmatized as un-creditworthy and unfit for markets.

Read More

John N. Robinson III. “Making Markets on the Margins: Housing Finance Agencies and the Racial Politics of Credit Expansion.” in American Journal of Sociology 2020.

Image: Culture:SubCulture via Flickr (CC BY-NC-ND 2.0)

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