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    The Mystery of Capital

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    by , 12-05-2009 at 10:38 PM (534 Views)

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    “We are here today because we stand on the shoulders of giants. And the giants have expectations of us. Dr. King once said, ‘I refuse to accept the idea that an individual is mere flotsam in the river of life, unable to influence the unfolding events which surround him.’....

    “The good fortune that brings us to this room today gives us a special ability, a special responsibility to influence the events unfolding around us.....

    “What are these unfolding events that demand our influence?....

    “We gather in auspicious times for Our Nation. After a decade of peace, prosperity, and progress, we meet peril again. Not just the peril of war, but the peril of self-delusion. A few weeks ago, a newspaper in the ....Washington.... area did a four-part series on ‘black money.’ It claimed that life for the African American has never been better. ....

    “It suggested that the quest for racial equality has been completed. In fact, in a major national poll last year, most Americans believed that when it came to jobs, income, health care, and education, the black American is doing just as well as the white American.....

    “Well, we all saw this extraordinary poll, but we loathe looking at the facts. ....

    “We must ask ourselves: What would life be like if the majority of Americans were right? What if the racial gap were closer? What would be our gain? ....

    “So, I did the math. If ....America.... had racial equality in education and jobs, African America would have two million more high school degrees; two million more college degrees; nearly two million more professional and managerial jobs; nearly a $100 billion more in income. If ....America.... had racial equality in housing, three million more African Americans would own their own homes. If America had racial equality in wealth, African Americans would have $760 billion more in home equity value, $200 billion more in the stock market, $125 billion more in their retirement funds, $80 billion more in their bank accounts. That alone would total over a trillion dollars more in wealth.....

    “The gaps demonstrate that the long journey of black Americans from an enslaved people to full participation in our society, a journey that began 137 years ago, is far from complete. ....

    “We have come a long way. We have won equal rights to education, employment, housing, and material success. Yet the racial gap persists. ....

    “Why is that? And how can we help close these gaps?....

    “Perhaps part of the answer lies in a recent book by Fernando Desoto, founder and president of the ..Institute.. of ..Liberty.. and Democracy, based in ....Peru..... The book is called The Mystery of Capital. ....

    “In it, Desoto sets forth a very provocative theory. He points out that wherever you go in the world, from the teaming cities to the remote villages, people are working hard to build and improve homes for their families. They may even own assets, tools, machines, equipment, or livestock. Perhaps they earn their daily living by harnessing those assets. ....

    “But there is a problem. ....

    “No matter how hard they work, they are unable to raise wealth-creating capital. Their assets do not have a life beyond their immediate use. ....

    “He calls this dead capital.....

    “In ....America...., he points out, assets have two lives: You can live off them, but you can also leverage that capital to unleash wealth. ....

    “Let me illustrate the concept.....

    “When you own a home in ....America...., your house has a daily value as a place of shelter, but it is also valued as an investment. Take those new townhouses on the island. Three years ago, the average sale price was about $157,000. Since then, the property value has appreciated a great deal. Today those homes are worth $224,000. ....

    “By appreciating in value, these assets have generated about $60,000 in capital gains. In fact, last year homeowners in ....America.... withdrew about $80 billion in equity wealth from their houses. With that wealth, they pay down their credit and pump about $50 billion back into the economy, thereby providing more economic stimulus than the tax rebate ever could.....

    “Assets in the ....United States.... produce capital so well, Desoto explains, because over the past two centuries we have developed one of the most sophisticated systems in the world for recording and protecting the ownership of assets. This system has evolved from the days when the early pioneers claimed and settled the frontier, creating a strong tradition and quest for individual property rights in ....America..... ....

    “Today, we have title to our home and our car. We have a land record, property register, patent, copyright, and contract. Because when you can prove ownership, you can more easily buy and sell your assets. You can insure against loss, borrow against and protect them in court. You can more easily pass your assets on to your children. ....

    “As Desoto argues, most of the developed world has this airtight system of asset protection, or the system could neither recognize everyone’s assets nor guarantee everyone’s legal rights to protection. ....

    “In the developing world, he says, eighty percent of the population cannot get their capital to generate wealth, because the law keeps them out of the formal property system.....

    “If you read Desoto’s book, it will dawn on you that while he referred to 80 percent of people in the developing world, his argument applies also to 12 percent in our country—the decendents of slaves. While our country has established one of the strongest systems of rights and protection, these people have been denied these rights with respect to wealth-generation. The suppression of black capital is the legacy of slavery itself, segregation and discrimination. These factors continue to keep the former slave [JEA1] out of the property system.....

    “Let’s explore this history a little for the first 250 years in ....America..... ....

    “In the past, the majority of African Americans not only had no property rights, they were property. Emancipation was supposed to change all that. The Fourteenth Amendment said that former slaves could not be deprived of life, liberty, or property, and slaves who fought in the Civil War were promised 40 acres of land and an army mule to work it. I am sure you’ve heard the phrase ‘forty acres and a mule.’....

    “Toward the end of the Civil War, General Sherman Howard issued Special Field Order Number Fifteen, which said, and I quote:....

    .. ..

    ‘The island of Charlotte South and the abandoned rice field thirty miles back from the sea and the country bordering the St. John River are reserved and set apart for the settlement of the Negro, who was made free by an act of war and the proclamation of the President of the United States.’....

    .. ..

    “....Sherman.... ordered this abandoned and forfeited land to be distributed in forty acres parceled to every free slave his troops had encountered, each to be furnished with a title of possession. By ..June 18, 18..65, about 40,000 former slaves had settled on this land. Incidentally, the land—below ....Charleston....—included what we now call Hilton Head and the coast, some of the most beautiful and valuable beachfront property on the eastern seaboard.....

    “History reminds us that the forty-acres plan was assigned to refugee freemen led by General Oliver Otis Howard, after whom ....Howard.. ..University.... was named. But, of course, General Howard never got to implement the plan, because President Andrew Johnson buckled under the political pressure and invalidated the ....Sherman.... order in favor of the previous white landowner. ....

    “So, instead of owning the property, any former slave who wanted to remain had to work for the former slave owner.....

    “This was just the beginning of a century-long process of denying former slaves access to property and, therefore, its power to create wealth. The Black Codes and the Jim Crow Laws made a mockery of the Fourteenth Amendment, which protected the property rights of freed slaves. ....

    “Many states even limited the type of property that a black person could own. In ....Homestead.., ..Texas...., the law explicitly prohibited the distribution of public lands to blacks. Even when former slaves were allowed to settle open land, property wasn’t easy to purchase or to keep. For example, at the Jim Crow Oral History Project at the ..Studio.. ..Museum.. in ..Harlem.., there is a story about a freeman who was encouraged by his white employer to purchase a coveted piece of real estate. The employer even helped him negotiate a federal loan, but then his son disagreed. Mysteriously, the freeman’s house was burned to the ground, killing the man’s younger brother and sister.....

    “All over the South, men dressed in white robes systematically drove away black families from the land and businesses. It is a bitter irony how, for much of the 20th century, this country’s system of property rights has denied black people their property rights.....

    “Remember the familiar story of Levittown, ..Long Island..? ....

    “The first major planned suburb in the United States, it was developed in 1947 to help house GIs returning from World War II. Note that 1.2 million black Americans had served in the war. Each ..Levittown.. home came with a restricted covenant stipulating that the tenant agreed not to permit the premises to be used or occupied by anyone else but members of the Caucasian race.....

    “In ....Washington.., ..DC...., African Americans had trouble closing the purchase of a house because the deeds required that no part of the property could ever be sold, transferred, leased, rented, or occupied by any Negro, or person of African blood.....

    “Racial covenants were written into the FHA[JEA2] underwriter’s manual. And it wasn’t until 1948 that the court outlawed racial covenants. ....

    “Still, you’ll be interested to know that while African Americans by 1920 owned 15 million acres of land, today they hold 1.1 million acres. Black ownership in ....America.... has receded throughout the 20th century. The shocking loss of property, as one observer has said, represents a massive wealth transfer from the black community.....

    “How did it happen?....

    “According to an investigation by the Associated Press, many black families had been driven from or swindled out of their property. Many lost their farmlands and business property, even their homes, because they did not have the will to resist; or else the family land was sold from under them. But even those African Americans who could obtain and protect their property could not always make full use of it, because they simply could not capitalize it to build wealth.....

    “And this brings us back to our Peruvian economist, Fernando Desoto: his concept states that assets have a second life because they generate capital. This is what makes the concept of forty acres and a mule so attractive. With this property, the freeman not only could raise crops to support his family, he could raise the capital to support his future. But here, again, African Americans have been denied the ability to raise capital against their property. ....

    “In fact, just three years ago, black farmers won a class-action lawsuit against the US Department of Agriculture for years of discrimination in farm lending practices. Each farmer won $50,000.....

    “A similar problem persists in house lending. ....

    “You are familiar with the term redlining? For years, banks had refused to make loans in certain neighborhoods. They literally drew a red line around certain areas. If you lived inside the red line, you were automatically rejected. Redlining was outlawed in 1968, but in 1992, the Federal Reserve Bank of ....Boston.... did a landmark study that showed why black mortgage applicants were rejected more often than whites. Where two loan applications needed extra work, the white family would get the help, while the black family was simply rejected.....

    “Today, most mortgage applications are done by an automated underwriting system that is color blind. The race of the borrower is not entered into the computer, and this technology has helped to improve African Americans’ chances for mortgage approval and home ownership.....

    “But a different kind of redlining goes on today. Black Americans are much more likely than whites to fall into the sub-prime mortgage market. About 22 percent of the sub-prime market consists of African-American borrowers. The problem is that the sub-prime loan has the highest entry rate in the entire market. Sub-prime mortgage could cost the borrower up to $200,000 more in interest payments than government loans like Fannie Mae. And many sub-prime borrowers actually could qualify for lower-cost loans, but they are being steered or seduced into high-cost loans. ....

    “Worse than that, inner city neighborhoods are prime targets for predatory lenders, who charge hidden and abusive rates and fees. When borrowers get behind, the predatory lenders will sell their house. When black Americans can afford a lease, they pay the most for housing capital. It is not only a denial of consumer rights, but also of capital rights. When African Americans cannot obtain capital or must pay abusive rates for it, they find it impossible to leverage their assets to generate wealth.....

    “In fact, the wealth gap has persisted for the last 20 years. We have seen no progress at all. This lack of wealth in black ....America.... explains why there is also a gap in education, jobs, and property ownership.....

    “Without wealth, it is hard to send your kids to college. Without college, it is hard to get a good job. Without a good job, it is hard to earn a good income. Without a good income, it is hard to obtain property. Without property and the capital to leverage it, it is hard to create wealth to send your kids to college. And the chain of denial continues. ....

    “Few people understand this chain of denial. They say that discrimination is illegal, that everyone has equal rights... What’s the problem?....

    “Well, I’ll tell you. The problem is that only 137 years and four generations have passed since African Americans have been permitted to learn, earn, and own. ....

    “We had great grandparents who were slaves. We have grandparents who were propertyless sharecroppers. We have parents who lived under Jim Crow. We have people in this room who suffer de facto denial of equal education, equal employment, and fair lending. ....

    “Since African Americans’ arrival four hundred years ago, we have suffered generations of subjugation, segregation, and discrimination. You can’t reverse the impact of all that in a single generation.....

    “African Americans have been denied the miracle of compound interest. A dollar invested in 1865 at three-percent interest would be worth almost 60 times as much today.....

    “How was wealth denied to the former slaves? They were denied access to the formal property system.....

    “Imagine how much wealth was lost when General Howard’s promise of forty acres and a mule was overturned. Today, on ....Kiawa.. ..Island...., a four-bedroom beach house on one acre of land list for $3 million.....

    “We know that the long journey from enslavement to full-participation in society cannot be completed in a single step. We cannot easily overcome the loss of 130 years of compound interest. ....

    “Short of that, what can be done?....

    “We must concentrate on steady asset-building. That way everyone, regardless of education or income, could harness their human capital, their willingness to work for the appreciation of their assets. Let’s harness ‘the mystery of capital,’ to use Desoto’s words, to build wealth and security. ....

    “We must be educated consumers and stay away from those vicious predatory lenders. Home ownership leads to stronger families and safer, more closely-knit communities, better schools, and services. Our children must go further in their education. They have to do better!....

    “Home ownership can close the gap in education, jobs, and income. It is absolutely critical to close the wealth gap. Owning a home is the working man’s capital engine. It signals the democratization of capital. More Americans earn more wealth by owning a home than by investing in the stock market. Owning a home is the most important and only leverage investment available to them. It is a powerful way to transmit wealth from generation to generation. For ‘Africans in ....America....,’ formerly called ‘slaves,’ home ownership has the power to mend the broken promises of forty acres and a mule.....

    “To conclude, today The Million Dollar Club is playing a crucial role in breaking the chain of denial that I just described. We want to leverage human capital through information with the hopes that society will be better as a result. ....

    “It is up to you to utilize—proactively—the information provided in this work and to leverage yourself to close the gap in employment, assets, capital, and wealth. You can make the miracle of compound interest work for you, for us! Do it for yourself. Do it for your family. Do it as a preparation for the unborn to come. Do it for the Nation, for future generations, and to honor the legacy of our former ‘enslaved’ ancestors and forbearers.....

    “You are far from flotsam in the river of life. You have the power to influence the unfolding events around you. ....

    “Thank you, Dr. King!”....

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