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How the U.S. can use existing financial systems to build an equitable post-COVID recovery

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Aron Betru, managing director of the Milken Institute Center for Financial Markets, joins Yahoo Finance Live to discuss a recent report focused on how to build an equitable post-COVID recovery utilizing existing financial systems such as Opportunity Zones, Minority Depository Institutions (MDIs) and Community Development Financial Institutions (CDFIs).

Video Transcript

JULIE HYMAN: And we have been covering that aspect of the COVID crisis consistently throughout it. That is the disproportionate effect on minority communities. We will be shining a light even more on it during this Black History Month, which, of course, begins today, it being February.

And to talk more about this, I want to bring in Aron Betru. He is managing director of the Center for Financial Markets at the Milken Institute. Our Reggie Wade is with us as well.

Aron, thank you so much for being here. So one of the things that you have written about and examined is the role that community-based financial institutions have in trying to address some of these disproportionate effects. Not just, obviously, health effects but also economic effects. So walk me through how that works within these minority communities and how you think these funds and this aid is best deployed through these institutions.

ARON BETRU: Thank you, Julie, and good to see you again, Reggie. I appreciate you spotlighting this issue, not only just because it's Black History Month, but because it's actually a major issue, not just within the African-American community, but the nation at large. When we talk about what happened in 2020, both in terms of the high rate of COVID cases, the high rate of COVID deaths that occurred in the African-American community, that impacts the nation at large, both in terms of its impact on the economy, its impact in terms of the multiplier effect that the stimulus would have overall.

And here is a couple of things to keep in mind. Prior to 2020, African-American wealth disparity versus white American was significant. And we're talking essentially by 2053, Black wealth median was going to hit zero. And so that means we were projected towards where nearly 50% of this country, of the Black American population, by that time frame, was going to end up having negative zero wealth.

And so when you think of what is it actually going to take to mobilize wealth creation, small business is a critical part of that. They need money to be able to grow. And we've had a long history of financial institutions, the banking sector, essentially missing an opportunity to support this group due to everything from unconscious bias on one end of this all the way to systemic and explicit racism that happens in the banking sector.

And so when we want to make sure that wealth increases, we want to make sure that the group that has been serving this, and in particular community development financial institutions, minority depository institutions, have the tools they need to mobilize capital. And so that becomes a critical part of what was in some elements of the first stimulus package from 2020, but also in the December package.

We needed to see everything from lending capacity through the PPP, but also by virtue of kind of long standing structural issues where small banks, MDIs, CDFIs as well, were much effectively dealing with a regulatory environment that really went against their ability to serve these communities. And so we needed to see tier one capital come in to help scale them up. And with that increased scale, you see more lending. And with more lending, specifically to small businesses, you see more job creation and a much better ability to actually bounce back from the twin health and economic crisis brought on by COVID-19.

REGGIE WADE: Aron, Reggie Wade, here. In your latest report, you cited the National Bureau of Economic Research reported that Black owner-- business ownership is down 41% from February to April. Latino businesses are down 32%. Is it just going to take stimulus to help fix this or do we need more of a fundamental change?

ARON BETRU: That's an excellent question. And yes, I think we're looking at the precipice of something that needs to be a much bigger, a much more bolder, look at how to address this. And in the beginning, I mentioned, you know, addressing the African-American and minority joblessness and, essentially, ability to bounce back from this COVID crisis wasn't just good for that community. We're talking about a very large part of this country's economic potential.

Addressing some of these issues brought was spotlighted as part of the Milken Institute paper that they released back in, I believe, 2018, 2019 said, if we address these problems, you end up moving $1 to $1.6 trillion of economic productivity in this country. That's 6% US GDP. So it's good for the country at large. And that requires a much bigger, bolder look.

Yes, we should be looking at, in any scenario, stopping kind of the negative slide that occurs. And sure enough, as part of the December package we had something to help repair some of these MDIs and CDFIs. And that was in the order of, I believe, we had about $3 trillion of funding that was going to go to the CDFI fund, about $9 billion that was going to go to something called the Emergency Capital Investment Program to help shore up these financial institutions and provide that access to capital that's quite critical. That's kind of that first stage, repair, if you will.

And then we need to kind of restore access to capital kind of at parity across this country. If we have predominantly minority census tracts having, I would say, roughly 70% of them not having a bank branch in their backyard, that becomes a very fundamental gap in being able to create wealth. And without that ability of both fueling wealth creation and addressing the income gap, we really have a big drain on this economy.

But more importantly, we need to look beyond 2020 and say, how do we reimagine this country in a much more equitable stance? I think we're going to end up seeing what is it, you know, something in the range of a couple of trillion dollars going to infrastructure, a couple of hundred billion dollars to addressing the health supply chain.

We need to really wonder how is that money being spent in this country and how can we make sure certain parts of this country that have not participated in the rising tide getting a piece of that increased stimulus spent? And with that, that's how you unlock the much larger economic potential of this community. And then it becomes not just good for the minority community, it becomes good for the country at large, which is exactly what we want going forward.

REGGIE WADE: Aron, we talked a lot about federal stimulus. Today, President Biden will meet with some members of the Republican leadership to talk stimulus. But do you think there's some onus that lies within the state and local governments? And what should they be doing right now to support minority investors, minority business owners?

ARON BETRU: Yeah, that's an excellent point. Essentially, the federal government can only do so much on the ground. Across all 50 states and the various territories there are pockets of underserved populations, and definitely African-American and minorities are a critical part of that. And there's been a bit of a lead that was taking place definitely as part of the stimulus package. We saw all this increased focus with regards to MDIs and CDFIs being a critical part of that.

And at the state and local level, there is a need to recognize that effectively looking at the local community financial institutions can only help them because those are the institutions that are going to create the jobs in their backyard for their local citizens. But above that, that raises the potential for tax revenue that this group ends up catalyzing. The state and local governments are definitely going to be a part of looking at that.

So whether it be local regulations and zoning rules or whether it be, effectively, some of the state and local stimulus that's coming from the federal government and thinking about distributing it into a co-investment that might happen with the local financial institutions, these things end up being kind of a critical way to localize the bounce back that's necessary.

And then taking that a step further, I mean, the executive order that President Biden signed in terms of racial equity and support for underserved communities, that gives you a playbook for what is essentially at the state and local government. We saw kind of four things that were kind of critical in it.

We saw a definition of equity that was necessary that we haven't seen that level of specificity. We saw, essentially, a recognition that we needed to be evidence-based and data driven, that was a requirement in that executive order. And I think that can help both state and local governments. And we also saw that a mandate to do the work, have a plan for addressing these inequalities in your backyard, both from the federal government level. But I think we should be emulating that at the state and local.

And then, you know, something that definitely was seen as kind of a hindrance on the federal side, is a revocation of Executive order, was it 13,950, which essentially got barred sensitivity training by the previous administration that said we need to actually engage on these issues. As American citizens, we do better when we lean in and talk about them and address them. And I think revoking that executive order helped actually advance dialogue in a much more meaningful way.

JULIE HYMAN: Yeah, transparency, accountability, these are all things we've been talking a lot about, so hopefully some of these actions will actually deliver. Thank you so much, Aron, appreciate your time this morning. Aron Betru is managing director of the Center for Financial Markets at the Milken Institute. And our own Reggie Wade as well, thank you both very much.