Banking Crisis: Black Americans Face Double Rigged Financial System

As we consider the banking turmoil that rocked domestic and international financial markets this week
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Black Americans have a history of avoiding share markets and banks, which is a sign of significant risk aversion. Our posture reflects avoidance of games that are proven to produce unfavorable outcomes—even if they occur rarely.

Not only that, but it is common knowledge that Black Americans must be twice as smart and must work twice as hard as White Americans to succeed in a US socioeconomic system that is rife with discrimination and racism.

Now add to the foregoing a present reality that those who own/manage/operate the economic and financial system are not to be trusted by Whites or Blacks, and it is incomprehensible that Black Americans continue to remain players (admittedly small players) in the system.

Simply put, Black America faces a doubly rigged system with very limited opportunities to win the economic and financial game. A very relevant question is: Why do we continue playing an unfair game knowing that there are alternatives?

As we consider the banking turmoil that rocked domestic and international financial markets this week, let us recall that: (1) Following the 2008/9 Global Financial and Economic Crisis, the US Government adopted so-called Dodd-Frank legislation to help prevent financial crises—a type of de-rigging of the game; and (2) Dodd-Frank was rolled back partially in 2018 during the Trump Administration—a type of re-rigging of the game.

But this is only part of the story. As we await the dropping of another shoe, and as fingers are pointed at the regulator (the Federal Reserve Board (FED)) for its failure to perform proper stress testing of banks to prevent failures, let us not focus on that left hand and fail to see the right hand which performed the real trick that created the current banking turmoil.[1]

We should realize that a key contributor to the current banking turmoil, which placed many in the trick, is FED and Treasury Department officials selling the US and the world (including major international financial institutions) on “lower for longer.”

This is the second rigging of the economic game that may cause significant pain to White and Black Americans alike.

For context, consider that following the 2008/9 crisis, US economic and financial officials used a well-known tool—Quantitative Easing—to kick-start the US economy. They drove interest rates to very low levels, and convinced investors that the nation and the world were in a new financial environment and under a new regime of low interest rates that would dominate for the long-term. As evidence, the Treasury Department shifted its debt portfolio from long-term high-yield instruments toward short-term very low-yield instruments. Everyone swallowed that hook. Stated simply, between January of 2009 and March of 2022, the Fed Funds rate averaged 0.52 percent.

Some might argue that those operating in financial markets should not have permitted the Treasury Department’s, the FED’s, and international financial institutions’ interest rate policy guidance to shape so rigidly their expectations about very low interest rates for the long term. Also, they may argue that everyone knows that the FED has a mandate to fight inflation and to achieve and maintain a 2.0 percent inflation target. In other words, everyone should have been prepared for the relatively sudden and rapid rise in interest rates over the past nine months in response to high and sustained inflation.

It is true that the FED made its first adjustment to the Fed Funds Rate in response to the recent surge in inflation in March of 2022. However, it did not signal with upward adjustments of the rate a very serious intent to fight inflation until June of 2022 when it imposed a 75 basis point increase in the rate. By March 2023, when the bank turmoil emerged, the Fed Funds rate stood at 4.57 percent.

Logically, if banks suffered from interest rate mismatches on investments during the early months of 2023, then the losses incurred when liquidating low yield investments are likely associated with investments that were made well before the point when interest rates began to rise robustly in June 2022—not thereafter. A less than nine-month window is the period of interest.

Therefore, it does not fair to place all the blame for the turmoil on banks. It seems that much of the blame should be placed at the doorstep of economic and financial policymakers, who failed to respond to rising inflation that breached the 2.0 percent FED target by March 2021. Unfortunately, the FED did not anticipate and signal a change in the expected path of interest rates at that time. In other words, by the time troubled banks realized that they had a problem during the second half of 2022, it was already too late to act without significant adverse consequences.

Yes, a perfect stress test may have sounded an early alarm. However, banks may not have responded in earnest to the alarm until the FED signaled a policy change and started hiking rates vigorously. As indicated, this did not occur in earnest until June of 2022.

The moral of this story is that White and Black Americans are suffering from this rigging of the system—a long and persistent song on an extended future of low interest rates, followed by a sudden and rapid rise in interest rates. But Black Americans have experienced a double rigging of the system: The just cited rigging plus a rigging of the economic and financial system through discrimination and racism.

Why do Black Americans continue to participate in a game that is doubly rigged against us? What are our alternatives?

One alternative is to: (1) withdraw from this unfair game; (2) retreat to our areas of influence (communities); and (3) concentrate on building the capacity to produce to meet our own requirements.

For certain, we should think long and hard about our response to this doubly rigged game. Clearly, our failure to exit the unfair game is inconsistent with our substantial risk aversion to the stock market and to banking, which is where we started.

Dr. Brooks Robinson is the founder of the Black website:

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