From Jim Crow Finance to Subprime Shenanigans : Expunging Financial Exclusion, Discrimination, and Predation from America

Over the course of the nineteenth and twentieth centuries, the U.S. financial system became more inclusive but subtle forms of financial discrimination remained, though they were difficult to prove statistically. Instead of reducing the residue of recalcitrant discrimination, regulators in the 1990s and 2000s instead lowered credit standards and thereby initiated the chain of events that culminated in the financial crisis of 2008. Lowered credit standards also precipitated a rapid rise in financial predation. Instead of lowering standards, creating government banks or programs, or forcing lenders to lend via regulation like the Community Reinvestment Act, policymakers should encourage new entry by groups that feel discriminated against, which was the traditional way that Americans had reduced financial exclusion and discrimination before the financial repression associated with the New Deal. New, small banks may be more fragile than larger ones but their exit, in cases where they are not able to lend profitably to groups that feel discriminated against, will not pose systemic risks