The Value Gap: Mehrsa Baradaran, author of ‘The Color of Money,’ on the moment she realized banking was ‘all smoke and mirrors’

In her book, “The Color of Money: Black Banks and the Racial Wealth Gap,” Mehrsa Baradaran, an associate dean and professor at the University of California-Irvine, exposes some of the policies that got the U.S. to this point — taking readers through tales from Reconstruction; the prosperous Black business community in Tulsa, Okla., destroyed by racism; and behind closed doors of mid-century public-policy debates to illustrate the limitations of our segregated financial system in achieving economic equality. 

MarketWatch spoke to Baradaran about how she got interested in the topics of her work, its impact and what the nation can do to create economic justice. 

MarketWatch: Can you first define your area of interest and research? And then tell me a little bit about how you got interested in that?

Baradaran: I was at a Wall Street firm during the financial crisis. Before that, I thought I would do immigration when I went to law school, because I’m an immigrant. I saw a lot of stuff that I thought I could help with. And then 9/11 happened in law school, and everything just really shifted on the immigration front. And I just got really frustrated with the way that the law ended up being an obstacle. Everything changed.  

Mehrsa Baradaran is the author of “The Color of Money.”

I ended up just trying to figure out, what am I going to do now? And I went to a law firm in 2005, and I was there during the run up to the financial crisis, and after there just kind of got a sense of, oh, this whole banking structure that I thought was this private system and ruled by market discipline is actually all this public system.

I started writing some articles from what I saw there as a real public intervention by the Fed, and then I just followed my interest into credit unions, and let the topics drive me. At some point, I was able to blend my interest for racial justice into banks. 

MarketWatch: You said you were an immigrant — where are you from originally?

Baradaran: I was born in Iran during the years of revolution. My parents had gotten in trouble with the regime there. We were able to get out when I was 9, and came to America. 

I grew up as an immigrant. My dad was a doctor in Iran, but here he had to do wage work. I really got to see the two sides of America, I guess you could say. I grew up in really low-income areas with kids whose parents worked. And so a lot of the work that I do tries to debunk these myths about poor people as being lazy or just bad with money. It’s just not my experience.

And it’s also not my experience that poverty is just the lack of money. There’s a whole system of exposure that you have in poverty to violence and power that you don’t experience when you have money. And I think it’s hard to understand for folks who have money.

MarketWatch: You mentioned also that the kind of work you’ve been doing in your books hadn’t really been done before. Do you have a sense of why nobody had written about it before?

Baradaran: One of the things that happens is in the neoliberal era, in the 1970s, is that banking became technical and not political. It also became really complicated. And so a lot of people who would otherwise have cared about these issues, were purposefully, I think, turned off from Fed policy and banking policy. It all got covered up in this idea of technical expertise being the only thing that matters on monetary policy.

And then as I got in the firm I really saw, actually, it was all smoke and mirrors. It’s just money. It’s just money making more money. And yes, the derivatives themselves are complicated, and the capital ratios are complicated, but these things are hiding what are actually real, structural inequalities, that — I’m oversimplifying here — but essentially, that will make the asset holders richer, and the workers, it’ll screw ’em. 

You see that system in the policy. Those decisions — and so now talking about Fed monetary policy, like [quantitative easing] and the bailouts and all of that stuff — those decisions were hidden under this veneer of technicality, and liquidity. When you understand what they mean, you can sort of peek behind the curtain and be, like, you’re making policy decisions, you’re making re-distributional decisions that you’re pretending are just technical decisions.

‘When you create QE to buy up bank assets — as opposed to home ownership — that was a moment where I kind of saw through the curtain. ‘

When you create QE to buy up bank assets — as opposed to homeownership — that was a moment where I kind of saw through the curtain. It was one of the moments where I was like, both of those things were equally possible. Neither made more sense on paper than the other one, right? You could save homeowners, you can pick up the assets through the homeowners or you could pick up the assets by taking them off the bank balance sheet, and they chose the bank balance sheets.

MarketWatch: Let’s talk a little bit about “The Color of Money.” How did you get interested in the Black banking sector? And why was that something that you thought would be a vehicle to explore all of the issues covered in your book?

Baradaran: I was mostly interested coming from that side of just kind of exposing the myth, of busting these things I kept hearing: bullsh— code words, or these mantras that banks kept repeating. One of the things I kept hearing about was community banking: You just need to save up your money, and that’s how you can gain wealth, and banks will lend. 

I mean, this is all coming from the Fed; the Fed can create trillions of dollars. I’m, like, what are you talking about communities saving their money and lending to each other? That’s not how banks work. They create money by lending; the Fed creates money through these programs. But when it came to poorer communities, they kept saying, “Oh, well, you should do microcredit.”

I did microcredit in college. I went to Peru, and [worked at an organization that] gave $500 loans at like 10% interest to these women because I thought that was the way to save the world. And I quickly got that she doesn’t need $500 with interest; she needs for her husband to stop beating her. And she needs actual autonomy and rights, and money and wealth as opposed to credit. 

‘I’m, like, what are you talking about communities saving their money and lending to each other? That’s not how banks work. ‘

But then post-financial crisis, after you’ve seen the Fed offer trillions of dollars to these banks … you keep hearing, “What poor communities need is microloans and [community development financial institutions].”

In “How the Other Half Banks,” my first book, I kind of expose that myth. I talk about how you did have community banks, but really banking became national because of deregulation, because of federal programs, which is fine. It’s good. Federal is not bad. If you look at the Jeffersonian versus Hamiltonian visions, and we just live in a Hamilton country. I do want to brag that I was a Hamilton fan before the play “Hamilton.”

I wrote that book, and then I was like, you know what would be a good way of demonstrating this point is looking at these immigrant banks, who were segregated — looking at one small thing to show a big thing. The big thing is that unless you are connected into the public fisc, that’s how money is made. And if you’re not, then you can’t actually gain wealth.

I was going to use immigrant banks as an example. But as I started digging into this research, the real story is Black banks, because here you actually have complete and total segregation, complete and total exclusion from the economy, and racism on top of that, so let me show how Black banks can and cannot grow wealth. I followed the research. It took years and years of digging into archives, and the book shifted as I learned more. 

MarketWatch: You mentioned that with some of your findings, you were like, “How had I never heard of this before?” What were some of the most surprising things that came up?

Baradaran: The Freedmen’s bank — I was shocked that I hadn’t known that whole story. It’s just such a pivotal thing. I went to the Freedmen’s bank inauguration at the Treasury; I was invited. And even the regulators there acted like it was this success story. I heard about it as a success story. But this is a catastrophic failure for America. Why are we talking about it as though it was good?

[Editor’s note: The Freedman’s bank was an institution, created by the government during Reconstruction, where formerly enslaved people could deposit their money. The bank ultimately went bust, sowing distrust of banking institutions in the Black community for decades.] 

I didn’t know about the [Fair Housing Administration], post-New Deal era — the explicitness of the racial covenants and everything [related to] homeownership, zoning, was about anti-Blackness: Just keep Black people out of your community. 

The major, major, major thing I did not know about was Nixon’s Black capitalism program, and how every program that we now see as racial justice programs — so affirmative action, minority business associations, Minority Business Development Agency, CDFIs — all of that comes from this very skillful, manipulative move by the Nixon administration as part of their Southern strategy to oppose the civil-rights era’s demand for economic justice. 

‘The history of Black banking, following as this emblematic example, becomes this weapon in the hands of Nixon.’

He opposed integration, opposed reparations; those were the two major things that were taken seriously at the time. He creates this whole structure and it’s all about stories of Black success and Black banks. The history of Black banking, following as this emblematic example, becomes this weapon in the hands of Nixon. I was shocked, and I spent months in the Nixon archives, looking through all of the memos, and then I read just the primary documentation there. And I’m really, really, really happy after this happened. I had a bunch of people write me, at least 10, in the Nixon administration, who said, “Yeah, that’s how I remember it.” 

I think a lot of people, when they go into the Nixon archives, they focus on the presidential stuff; they focus on the Watergate stuff. And I was looking at these memos with Greenspan, who was his economic advisor, and finding this stuff [and thinking] it just cannot have been a purposeful plan. But it was. He knew what he was doing, and I think I was naïve about that. I am no longer naïve about the way that he skillfully and cynically just stopped the civil-rights movement. 

MarketWatch: What are the implications of all that stuff today?

Baradaran: Myths that we tell about personal responsibility, and bad decision-making and culture and all of the theories that we have — people just made up these stories. And some of these stories were just handed down from the cynical people at the top, who said, “Oh, blame culture, blame their not-business-like nature.”

You had banks refusing to lend to Harlem — this is in the 1920s — and saying, “We don’t lend there because they don’t know how to do business.” But you’re not giving them business loans. So how can they do business if you’re not giving them business loans? So you see the self-perpetuating cycle of, “We’re not going to give you the thing you need to start a business, and then we’re gonna blame you because you didn’t start your business. We’re not going to give you the loan to have a home, and then say, ‘Oh, you’re not a homeownership culture.’”

When you see these enough times in history, you start to see this pattern. That is one of the biggest myths that we tell right now about the racial wealth gap. This idea that it’s a matter of personal responsibility and culture. We just focus on the Black communities, and the problems that they have and the things that they don’t do, instead of spanning out and looking at, “Oh, how did white people gain wealth?” Oh, it turns out, all these government subsidies. And how do white banks survive the financial crisis? Oh, it turns out the Fed came in and bailed them out.

And then if you say, “Black banks were just vulnerable; they couldn’t get these bailouts” — well, why? That was a choice.

‘That is one of the biggest myths that we tell right now about the racial wealth gap. This idea that it’s a matter of personal responsibility and culture. ‘

MarketWatch: What should we be  doing today to rectify those policy errors?

Baradaran: One of the things that Hubert Humphrey starts to mix in during the [1968] election is you can’t have Black capitalism without capital. During Reconstruction that was a major theme that kept coming up, that you can’t have freedom without land. You can’t have political equality without economic equality.

We’ve been trying to maintain this lie that you can just give people civil rights and political rights, and not make up to them the fact that you have deprived them of property, and of their wages, and of these homeownership benefits that we’ve given to other people. And then we keep saying, “OK, we’re good now, and we’re going to give you the right to vote, and you’re going to have equal rights under the law,” without remedying this problem.

This problem needs a remedy before we can actually have equality. That remedy looks like what it looks like during Reconstruction. It looks like what it looks like post-New Deal [for white Americans] … land, capital, assets, the same way that white institutions and white people gain wealth — through some government subsidy.

MarketWatch: This summer, in the aftermath of the killing of George Floyd, one of the responses we saw was Netflix NFLX, -5.64% put a bunch of money into Black banks. And I was wondering, how should we understand that given what you lay out in the book?

Baradaran: The employee at Netflix [who spearheaded the effort] read my book. That’s what inspired him — he was very clear. I talked with them when they approached me. I was like, “You know that I’m not saying this? You know that the thesis of my book isn’t this?” They did. He got that; he read the whole book. It’s a way of Netflix putting their money where their mouth is. 

Then Fortune magazine came to me and said, “Bank of America BAC, +0.68% is putting $300 million into Black banks.” I’m like, “Nope, nope.” Netflix is a company that their business model is committed to racial justice. They are an entertainment company. And in their backyard, the thing that they do is they create representative content. They’re a content creator, they’re entertainment, and they have not yet perpetuated the racial wealth gap.