McDonough: Connecting Finance with Communities: Building Stronger Neighborhoods

September 6, 2001
William J. McDonough, President and Chief Executive Officer

Remarks by President William J. McDonough before the One London Conference Introduction

I am delighted to be here this morning to address such a distinguished group of leaders from the business, financial, not-for-profit and government communities. I commend oneLondon under the leadership of Amanda Jordan and David Walburn for organizing this conference and focusing it on the role that the business and financial sectors play in neighborhood revitalization. I would also like to thank the Bank of England for hosting this meeting today.

During the past several years, people in the U.S. and the U.K. interested in inner city revitalization have had a healthy exchange of ideas about regeneration strategies and the elements that make-up a successful community investment model.between people in the U.S. and the U.K. Delegations from London and New York have exchanged visits over the past two years to see first-hand how local community developers manage complex revitalization projects. The community development approaches in London and New York that we looked at share a vision of improving the physical infrastructure of their neighborhoods while at the same time transforming people’s lives for the better.

Most recently, Chancellor Gordon Brown visited New York and I enjoyed discussing with him how to build on our experiences. And while the problems of American and British cities may differ in size and scope, the solutions must have at their core, holistic and inclusive partnerships that begin by building individual and community wealth. These are issues that are important to me and that I’ve thought a lot about for a long time, both in my native Chicago and in New York. Disparities in the distribution of wealth and income threaten the social fabric both in the U.S. and the U.K. It is in all of our self-interests to address the inequalities that exist in our societies so that there is as small a permanent underclass as possible. We must ensure that there is concrete hope and economic opportunity for all in order for our societies to prosper. In New York and London, we live in vibrant, global cities with both wealth and poverty existing in an uneasy balance. The underlying strength of our economies offers a unique opportunity to bring disadvantaged communities into the social and economic mainstream.

In my remarks, I will focus on what I believe works and doesn’t work in revitalizing inner city neighborhoods and the roles that different sectors, including the central bank, play in the process. As you all know well, there is no magic formula. The problems that exist in these neighborhoods are complex and multi-faceted. This is a continuing issue to confront, with progress measured house by house, street by street, neighborhood by neighborhood. To do nothing ensures the deterioration of the standard of living of us all. To not do enough is to squander opportunity.

There have been successes, some of which I will talk to you about today, that have created a framework for comprehensive community and economic development. This framework is based on partnerships. It involves the government working together with people living in inner cities and the not-for-profit community development organizations that represent them, along with private foundations, banks, and corporations. The more I think about it, the more I’ve concluded that these partnerships, which require coordination, cooperation and agreement among all interested parties, no matter how difficult to achieve, are the proper - if not the sole - path to follow if we are to succeed in bringing long-term, positive change on the breadth of scale we need.

Lessons from the Past

Let me tell you some of the lessons we’ve learned, starting with things that haven’t worked:

Social exclusion doesn’t work. Isolating the poor in targeted neighborhoods with no social or economic diversity will not rebuild communities. A successful community must attract people of different income levels, classes and interests. It must be a place where people want to live, where they want to visit and where they want to invest and do business. If you have these elements, you have the conditions for a thriving community.

Sending self-appointed experts from outside of the community to identify problems and develop solutions doesn’t work. In the 1960s, with the backdrop of the U.S. civil rights movement and hefty federal government spending, we created top-down, government-driven strategies to alleviate poverty without due regard for the impact on community residents. The lesson we learned was a hard one. We must not ignore the needs, interests and resources of the people living in these communities and what change might mean for their neighborhoods. It is pretty clear to me that when community residents are given a chance to develop their vision and talents, to be full partners in a common enterprise, then everyone benefits.

Building high-density housing, without complementary businesses and services, that isn’t integrated into the surrounding community doesn’t work. Fifty years ago we created urban renewal programs that demolished existing housing in inner city neighborhoods and replaced it with high-rise towers capable of housing thousands of families, isolating them from the rest of the community. It didn’t work, with some disastrous results. This housing has begun to be replaced by lower density homes, many of which offer homeownership opportunities for local residents, that are developed as part of broader community plans.

Focusing on building bricks and mortar without considering building wealth for the community and the individual doesn’t work. To transform a neighborhood, there must be comprehensive community-based planning which includes fostering individual wealth accumulation and support for the social and physical infrastructures of our inner cities.

Government can’t do it alone. In the U.S. during the past five years, we have had welfare reform in a time of unprecedented job creation. While this reform has not yet met a rigorous test, we’ve learned some things in the process. We’ve learned that we have to break the cycle of dependency upon government programs. In turn, we must connect people to the mainstream economy through jobs, giving them access to financial services and increasing their understanding of how the financial services system operates. People living in inner city neighborhoods have to be active participants in shaping their own futures.

Thinking of neighborhood revitalization efforts as charity rather than good business opportunity doesn’t work. There is untapped market potential in inner city neighborhoods. A recent study by the Washington, D.C. based Brookings Institution estimates that in the U.S. individuals with reported incomes of less than $30,000 make almost one-third of all consumer expenditures in the country. Other studies on inner city lending indicate that the performance of loans made in inner cities does not vary significantly from more typical lender portfolios. These are emerging communities with profit potential.

To create economically viable inner city neighborhoods, community entities must work together. When banks lend money, corporations provide jobs, services and investments, governments support infrastructure, foundations provide long-term capital and neighborhood organizations coordinate and manage the regeneration process, neighborhoods can be redeveloped effectively and efficiently. I suffer no illusion that this is easy. It requires skill, patience and determination. Above all, it requires leadership.

The Second Harlem Renaissance

In New York, one example of how the lessons from the past have shaped the future in a positive way is now developing in Harlem. As you may know, Harlem has a long history as the center of African-American culture. During the 1920s, the neighborhood abounded with artists and performers who created an outpouring of literature, drama, music and painting that has come to be known as the Harlem Renaissance. But during the past 40 years, as the problems faced by inner cities spread, the community became a national symbol of urban despair. There was a rise in homelessness and crime, and wholesale abandonment of buildings by landlords. In the early 1990s, as a result of foreclosures, 60% of the housing stock in central Harlem was owned by the City of New York. There was diminished economic opportunity for residents.

Let me tell you about a recent trip I took to Harlem with Chancellor Brown. During our visit, we saw first-hand what is now being called the Second Harlem Renaissance. On 125th Street, one of Harlem’s main streets, the crime rate is down, employment is up and where drug dealers once dominated, there’s a supermarket that anchors the area’s main commercial strip. Completed in 1999, this supermarket was the first new commercial project in Harlem in 30 years and the first supermarket of its size in Harlem ever. The company that owns this store has disclosed that it is one of its top performers in its first year. In addition to bringing a much-needed variety of products to the neighborhood, this store has provided 280 full-time jobs to local residents. Also on 125th Street, we saw the construction of Harlem Center, a new commercial development which, when completed, will include over 300,000 square feet of retail, office and hotel space and provide an estimated 760 permanent jobs.

On 116th Street, we saw a new 240-unit apartment building that offers homeownership opportunities to families with low- and moderate-incomes. Thanks to a combination of private and public funding, families earning up to 50% of the area’s income can own their own homes for as little as a $5,000 downpayment and have a stake in their community. Sponsors of the project received over 3,500 applications for the 240 units. Neighborhood residents were given first preference.

On 127th Street, we saw a two-building housing complex with 66 low-income units, 30% of which are reserved for formerly homeless families, with rents that are affordable to those earning less than 50% of New York City’s median income or $28,000. Everywhere we went, there were signs of economic vitality. Through the energy of local residents and nonprofit organizations working with the private and public sectors, the area has been reborn. And the neighborhood is changing -- new people are moving in and new businesses are being created.

So is this gentrification? Should residents be afraid of how their community is being transformed? This is a much debated issue and many people are concerned that change is adversely impacting long-term residents. I believe that in the revitalization process change is inevitable and good. Communities that are not dynamic will not thrive. But as change occurs, the people who must be its primary beneficiaries – the community residents - cannot be left behind. Their needs must be taken into account and, given a stake in the process, they will feel less threatened and more invested in the outcomes. They become the beneficiaries of the increased community wealth spurred by development. They are able to take part in capturing the value that’s being created in the community to attain individual wealth and transform their lives. To accomplish this, there must be planning up-front for jobs, affordable housing, and homeownership opportunities for community residents and assistance for existing small businesses. These plans must be implemented in partnership with residents and local nonprofits. Managing community change successfully also requires ongoing communication and coordination.

Key Players and Their Roles

How did we get here? The key lesson is that to reverse neighborhood deterioration requires a diverse set of players, including, but not limited to, private foundations, governments, not-for-profits, banks and corporations. I’d like to take a few moments to talk about the roles that each of these sectors plays, at least in the U.S.

Private foundations play a fundamental role in the community development process. In the earliest stages of revitalization efforts, foundations often fund feasibility studies and other community research and development initiatives. They also provide critical patient capital that seeds projects and acts as a catalyst for additional investment by the private and public sectors.

A key role of the government is to provide tax incentives and subsidies for housing and new business development. In New York, the federal, state and city governments have invested hundreds of millions of dollars, through grants and tax incentives, in inner city neighborhoods. Through the U.S. Empowerment Zone program, a national initiative to provide financial and technical assistance for designated distressed communities, during the last several years, Harlem has received $300 million of public investment. New York City provides tax abatement to property owners for the rehabilitation of substandard housing and during the past 8 years has transferred to private ownership most of its inventory of foreclosed properties and land. New York City municipal pension funds are major investors in affordable housing loans, creating liquidity in that market.

Are these government subsidies for the poor? No. Providing tax and other incentives for development, and job creation and retention for the community is an appropriate role for government. It’s a common practice for large corporations to receive incentives to stay or relocate to non-inner city areas. Local governments provide tax rebates, build or improve roads and make other infrastructure investments using bonding authority to make their regions more enticing to companies. Whether it is in this context or in an inner city context, offering incentives to keep a community growing and vibrant is the right thing to do.

Community development corporations are tax-advantaged entities designed solely to represent and work within their local neighborhoods to improve the delivery of services and the condition of housing stock and to help support the development of local businesses. They channel public and private resources into community initiatives. Banks and other corporations provide money for programs and financial support to help build the capacity of these organizations. In Harlem, the Abyssinian Development Corporation (ADC) is involved in a great deal of the revitalization that’s taking place in Central Harlem. ADC was formed in 1986 by a group of volunteers from Abyssinian Baptist Church, America’s oldest African-American church, who wanted to improve their neighborhood. The organization, which was started with a $50,000 grant from a private foundation and a staff of one, now has over 55 employees and has been the catalyst for the investment of more than $100 million in the Harlem community. In the Crotona Park East section of the Bronx, a neighborhood that has fought its way back from urban decay, another local community development corporation, colorfully named the Mid-Bronx Desperados Community Housing Corporation, is responsible for over 2300 units of housing with total development costs of $250 million.

During the past 20 years there has been a big shift in how U.S. banks do business in the inner city. Initially, the Community Reinvestment Act, a 1977 law that requires banks to help meet the credit needs of all communities in the areas in which they operate, was the catalyst for making capital available in low-income areas. At first, lending in inner cities was done under government duress and not part of a bank’s mainstream business. Since then, banks have had positive experiences and now realize that there’s profitable business to be done in these markets. Most say they would continue making these loans and investments even without regulation. They have changed the lens through which they view inner city markets and developed business partnerships with local non-profit and intermediary organizations to create a new generation of products and services that respond to the needs of low- and moderate-income customers. By thinking outside of the traditional underwriting box, banks have been able to build upon substantial public subsidies, grants from private foundations and investments by other nonprofit intermediaries to make lending more attractive and reduce risk. In New York, the competition to make loans and investments in places like Harlem or the South Bronx is so strong that the challenge now lies in continuing to identify new lending opportunities. In most cases, banks rely heavily on local partners to help identify opportunities, structure loans and investments and provide valuable technical assistance to borrowers, and manage projects through to completion.

The corporate sector in America has become increasingly involved in the neighborhood revitalization process. Initially, corporate involvement was mainly through their employees volunteering technical assistance to community organizations. While this is important and should be encouraged, U.S. corporations now also make substantial direct financial investments, sometimes spurred by tax incentives, to support the work of the local organizations implementing community development plans. Corporations also provide job training opportunities for local residents, an important pipeline for new employees in what has been a tight labor market.

The Role of the Central Bank

Where does the central bank come into this? Why are we involved in community development? As the central bank of the United States, the Federal Reserve is concerned with economic growth in all sectors of the economy. This includes all communities regardless of income. Historically, low- and moderate-income and minority communities have not prospered as well as others, often due to a lack of information about opportunities. At the Federal Reserve Bank of New York, through our Office of Regional and Community Affairs, we work with the private, non-profit and government sectors to furnish information about opportunities and conditions in disadvantaged neighborhoods. We get to know the local organizations and introduce new ideas and models to help address local issues. As a convenor, we bring together key players in neutral forums and act as a catalyst for the creation of new partnerships. It’s also important that we, as the central bank, publicly recognize success stories and the very committed people and organizations that are involved in them. Let me give you some examples of our work in community development:

Through an initial conference and subsequent follow-up meetings, we have looked at the technology or "digital" divide and its effect on low- and moderate-income communities. We are part of a group to help low-income people develop the skills necessary to get higher paying information technology jobs.

We are a founding partner of the New York City Financial Services Partnership for Youth, a workforce development initiative designed to link the financial services sector with the young adults. The mission of the partnership is to provide meaningful work experience opportunities to unemployed and underemployed 17-22 year olds residing in low-and moderate-income neighborhoods. Participants in the program receive classroom training, paid internships at participating financial institutions and mentoring.

We held a series of roundtable meetings in rural communities with bankers and local community representatives to identify development issues there. As a follow-up, our staff is researching how to use equity capital in rural communities for economic development and we plan to reconvene the roundtables this fall to introduce several successful models.

We organized a group of bankers, community organizations, realtors, insurance agents and others to identify and eliminate barriers to homeownership for low-income people on Long Island. This group of local leaders has created a separate not-for-profit organization that has developed an educational campaign that continues to address these issues.

These are just several examples of the role that we play as the central bank in promoting community development.


Your attendance at this conference today is evidence of your commitment, interest and willingness to participate in the rebuilding of your inner city communities. While much has been done, there is still so much more to do. I recognize how complex and difficult the issues are and that solutions aren’t solely a matter of good intentions. Permanent solutions involve putting together people and organizations of similar, but not necessarily overlapping, interests to create meaningful partnerships. While good intentions are an important element of this, there also must be sustained effort and commitment of resources to leverage the assets of inner city neighborhoods for the long-term benefit of the residents. I urge you to examine where you can do more and where your organizations can engage others in these efforts.

As I mentioned at the beginning of my remarks, we’ve been pleased to host visitors from the U.K. in New York. To date, representatives of the government and not-for-profit sectors have been involved in these trips. Today, I would like to invite corporate and banking leaders to come to see some of the progress that’s been made. Arrangements can be made through our Office of Regional and Community Affairs. We’re serious about this and I hope you are, too.

Thank you.
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