Ben S Bernanke: Community development in challenging times
Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve
System, at the Federal Reserve Community Affairs Research Conference, Arlington, Virginia,
29 April 2011.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
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As always, I'm pleased to join you at the Federal Reserve's biennial Community Affairs
Research Conference. This meeting brings together researchers, community development
professionals, and public-sector officials to explore how best to strengthen struggling
communities. Needless to say, that endeavor is more crucial than ever. The past few years
have been very difficult. Weak economic conditions at the national level have translated into
hardships in many communities at the same time that communities have fewer resources
available for stabilization and revitalization. Considerable good work is going on nonetheless,
and I will offer a few examples of that today.
At the national level, the economy is recovering at a moderate pace. In particular, the labor
market has been gradually improving and the unemployment rate has declined somewhat.
But unemployment remains quite high, particularly among minorities, the young, and those
with less education. What's more, long-term unemployment remains at historically high
levels. Nearly half of the unemployed have been out of work for six months or more. The
housing market is also holding back the recovery. The foreclosure rate remains very high,
and many homeowners who have avoided foreclosure find themselves "under water,"
meaning their mortgage debt exceeds the value of their homes. Obviously, the problems in
the labor market and the housing market are not unrelated. In particular, lost income from
unemployment is causing many families to fall behind on their mortgage payments.
The challenges to communities
As families have struggled, so have their communities. In some areas, for example, high
foreclosure rates have produced significant numbers of vacant properties, depressing
surrounding home prices, attracting crime, and creating financial burdens for local
governments. Thus, some community development groups now are simply trying to hold onto
past progress that they have made in building up the physical infrastructure and human
capital of their communities, while others have lost ground and are beginning the process of
rebuilding.
While the scale of the problems has been exceptional, many of the problems themselves are
not new for lower-income families and communities that were already struggling. People who
were vulnerable to begin with - those with low incomes, few assets, and less education -
have had a more difficult time weathering the financial storm or recovering from setbacks.
The same is true for communities that were already relatively poor, with fewer community
assets and insufficient drivers of economic growth.
To solve problems, we must first understand them. Like many of you here today, the Federal
Reserve has been engaged for some time in research and analysis of the economic
challenges faced by neighborhoods and communities as well as by individuals and families.
For example, in 2008, the Federal Reserve Banks and the Board of Governors, in
partnership with the Brookings Institution, published a study of the effects of concentrated
poverty on communities.1 The communities studied included older inner cities in the North,
smaller cities in the South and West, Native American reservations, "gateway"
neighborhoods that are entry points for immigrants, and rural areas in Appalachia and the
Mississippi Delta. What these diverse communities had in common was that they did not
share in our country's general prosperity, even in good times. Our research identified some
of the barriers to economic progress shared by these communities, including inadequate
schools and workforce skills, lack of investment in infrastructure and business development,
and limited institutional capacity. Not surprisingly, these communities were particularly
illequipped to deal with the recession.
Of course, economic conditions in a given community both affect and are affected by the
economic status of the individuals and families in that community. One of the most valuable
sources of data on family finances is the Federal Reserve Board's triennial Survey of
Consumer Finances.2 To better understand the effects of the crisis on households, the
Board, in a special update to its 2007 survey, asked the participants about their financial and
personal circumstances two years later, in 2009.3 The findings help illustrate the challenges
facing families and communities.
According to this special survey, lower-income households continued to experience
significantly more unemployment than higher-income households. In 2009, nearly one-fourth
of the families in the bottom half of the income distribution had at least one member who was
out of work for some portion of the year prior to the survey; this rate was about double that of
higher-income households.
Declines in the values of homes and stocks sharply reduced the wealth of many Americans
during the crisis. Three-fifths or more of families across all income groups reported a decline
in wealth between 2007 and 2009, and the typical household lost nearly one-fifth of its
wealth, regardless of income group. Moreover, one in eight of the households in the panel
started the crisis with zero or negative net worth and thus had scant resources to fall back on
to maintain their standard of living during bouts of unemployment.
Unemployment and declines in wealth obviously can make it difficult for a household to pay
its debts on time. The survey update found that lower-income households fell behind on their
payments at a substantially higher rate than higher-income households. Among households
with debt, about 11 percent of those with incomes in the bottom half of the income
distribution fell 60 days or more behind on at least one of their obligations in 2009, compared
with nearly 3 percent of those in the highest tenth of the income distribution.
Just as lower-income households weather financial storms with more difficulty, the same is
true of communities. Even before the crisis, some neighborhoods, towns, and cities were in
distress. Those areas already lacked sufficient assets such as strong public schools and
community facilities, and rising unemployment and falling tax revenues reduced the funds
available for public services even as needs increased. Often, residents were
disproportionately unbanked or underbanked and relied on expensive alternative financial
service providers. In communities with already low housing values - due, for instance, to
oversupply caused by population shifts - the wave of foreclosures that began in 2007 sent
the number of vacant properties soaring, causing additional problems.
In short, the financial crisis and recession touched many families and communities. But those
that were struggling before the crisis were often disproportionately affected.
Responding to the challenges
The challenges for those working to address the many evident problems in troubled
communities can be daunting. When so many social and economic problems are
interconnected - high unemployment, foreclosures, crime, loss of tax revenues and social
services, lack of economic opportunity - deciding where to start to improve the situation can
be quite difficult. Certainly no single program or approach will address all of the problems.
But realistically, we have to pick places to begin, with the expectation that finding solutions in
one area will confer wider benefits. For example, providing responsible credit for individuals
and small businesses through community development financial institutions can stimulate
economic activity that generates local tax revenues. Those tax revenues can be spent on
programs to put vacant properties back into active use, helping to reduce crime, or on job
training or economic development programs, leading to more employment and wage income
that can help homeowners avoid foreclosures.
As the Board's eyes and ears around the country, the Federal Reserve Banks have kept us
well informed of the variety of ways local communities are meeting the challenges of tough
times in troubled communities. Though the following is only a small sampling of the work
going on around the country, I'd like to share a few of these stories with the hope that one
community's success may lead others to emulate it.
In Massachusetts, for example, a community development financial institution called Boston
Community Capital is pursuing an innovative strategy to prevent occupied homes from
becoming vacant and creating a strain on the community. Through special financing entities,
it buys foreclosed-upon but still occupied homes from lenders at market value. The initiative,
dubbed Stabilizing Urban Neighborhoods, or SUN, is focused on six low-income
neighborhoods in Boston that have the city's highest concentration of foreclosures. Taking
advantage of the diminished home values, the group buys the properties and then resells
them at affordable prices to existing occupants - both owners and tenants - who can
demonstrate that they have suffered hardship. This program prevents properties from
becoming vacant and provides families with a sustainable and affordable housing situation; it
is designed to start small and expand as needed.
In the South, ACCION Texas-Louisiana, a nonprofit organization, has been focused on
assisting entrepreneurs start small businesses and helping existing small businesses to
expand. ACCION lends to entrepreneurs whose businesses are too small or too new to
qualify for a regular bank loan. Minority-owned businesses receive more than 80 percent of
its loans, and almost half of the lending goes to women-owned businesses. Since 2009, the
organization has expanded from Texas into Louisiana to respond to small businesses
affected by Hurricane Katrina. The recession put extra pressure on ACCION, as existing
borrowers were having increasing trouble paying back their loans. At the same time, demand
for its services increased, as newly laid-off workers were seeking loans to start their own
businesses. The organization responded by expanding its services - opening a business
support center and business incubators, providing more comprehensive technical assistance,
developing new business partnerships, reaching into new markets, and strengthening its
underwriting platform to reduce waiting time for applicants and reduce its own costs.
In my home state of South Carolina, as in many parts of the country, the effects of the crisis
varies from community to community. For instance, the city of Charleston, a popular tourist
destination known for its historic architecture and fine cuisine, is faring relatively well overall.
Even so, both unemployment and poverty in the greater Charleston area increased
significantly between 2007 and 2009.4 Median income in the nearby city of North Charleston,
which has struggled ever since a naval base closed in 1996, is about three-fourths that of
Charleston. In some older neighborhoods, families have moved out, leaving behind many
vacant properties. Some parts of the metropolitan area are experiencing economic growth,
but the benefits of that growth do not reach all communities. While some major corporations
have expanded into the area, inadequate education and training, as well as the lack of public
transportation, make it difficult for many residents of low-income and minority communities to
take advantage of new jobs. Local development groups have been working to ameliorate the
situation. For example, Metanoia CDC, a community development corporation, is located in
the heart of the old naval communities of North Charleston, and its work has visibly improved
the hardest hit communities. Its holistic range of programs - in community leadership, quality
affordable housing, and economic development - appears to be contributing to decreasing
crime, rising student grades, and homes for first-time homebuyers. The group focuses on
building assets - both physical and human - such as transforming vacant buildings into
homes for families and helping students in a Young Leaders program improve their
performance in school.
In the San Joaquin Valley of California, the unemployment rate hovers around 18 percent. In
2009, in response to the ongoing foreclosure crisis, nonprofit agencies; local, state, and
federal agencies; academics; real estate professionals; financial institutions; small business
and workforce development professionals; and loan servicers organized the San Joaquin
Valley Foreclosure Task Force. The original intent was to coordinate efforts on a regional
scale to avoid preventable foreclosures. This work continues, and the group is now
expanding its efforts to also help families that have already gone through a foreclosure. This
year, the task force is beginning a series of foreclosure recovery workshops across the
valley. Families will learn about local programs and assistance, including job training and
employment assistance. Credit counselors will help them begin repairing their damaged
credit. And, in cases in which they may be victims of fraud, they will receive guidance and
referrals to legal aid attorneys.
As a final example, in Cleveland, local leaders in the Slavic Village neighborhood have been
dealing with some of the highest foreclosure rates in the nation since the 1990s. Cleveland
saw population loss for five successive decades, resulting in an oversupply of housing. With
the onset of the financial crisis, the problem began to worsen dramatically. By 2007, Slavic
Village was the Zip code with the highest number of foreclosures in the nation. By 2010,
more than 1,500 properties in a neighborhood of 11,000 homes needed to be demolished.
This community has a history of strong neighborhood organizations, and as might be
expected, its residents, community leaders, nonprofits, local governments, and companies
stepped up their efforts. In one partnership, community groups are using data provided by a
local university to identify borrowers at risk of foreclosure and are reaching out to them, door
to door, to see what might be done to prevent a foreclosure. In another example, residents
and community leaders in Slavic Village alerted county prosecutors to fraudulent lending in
the neighborhood. As the crisis continues to play out, community leaders have found ways to
reuse vacant land, adding gardens, yard expansions, and bike trails among the
neighborhood's declining number of homes, making it safer and more attractive. Business
leaders are helping as well by purchasing and demolishing properties adjacent to the
gardens and trails and supporting the renovation and expansion of a nearby school and
recreation center.
I have cited just a few examples of work that is making a difference at the grassroots level all
around the country. They show that, though the challenges in troubled communities are
indeed daunting, we are far from helpless, and much good work is being accomplished.
For our part, we at the Federal Reserve will remain closely attuned to the economic health of
all communities, including low- and moderate-income communities. Each of our Federal
Reserve Banks works with local leaders and community groups to provide relevant research,
data, and support, with the Board backing up these efforts across the country.
The broader economy is in a moderate recovery, and we have recently seen some welcome,
if gradual, improvement in the labor market. But our economy is far from where we would like
it to be, and many people and neighborhoods are in danger of being left behind. The work of
community groups, local leaders and businesses, and others is a critical component to a
national economic recovery. In addition to our work in regulating banks and in conducting
monetary policy so as to achieve maximum employment with price stability, the Federal
Reserve will continue to assist these efforts through local community outreach, by using its
convening power, and through research like that being discussed at this conference. If we
work together, I believe we can find effective ways to repair the damage done by the crisis to
the economic prospects of families and communities. Until vulnerable families and troubled
communities have regained lost progress, the economic recovery will remain incomplete.