Fundamentally the lesson that the USA refuses to learn is that
banking is an in your face local business that is very profitable.
If you step back from the source of profitability which is lending
safely to your friends and neighbors, you put yourself into a far
less profitable business and far riskier.
The natural inclination to accumulate more banks with cheaper money
has always been a questionable proposition and we are rarely
satisfied with the result. The exceptions treat their acquisition
merely
as investments and keep them separated. GE comes to mind.
The problem with too large banks is that they need to lend to too
large conglomerations. The economy needs the opposite. Germanies
track record effectively proves the case. The distributed
cooperative banking system allows German businesses to get cheap
money and that is the bottom line folks.
In the USA, attempting to factor even great business is a trip down
usury lane for most small to mid sized companies.
As Ellen makes clear the market will be satisfied and local banking
is well on the way to been established. And this will ultimately end
the drought.
Cooperative Banking
is the Exciting Wave of the Future
Posted: 05/23/2012
4:22 pm
Ellen Brown
As our political system sputters, a wave of
innovative thinking and bold experimentation is quietly sweeping away
outmoded economic models. In 'New Economic Visions', a special
five-part AlterNet series
edited by Economics Editor Lynn Parramore in partnership with
political economist Gar Alperovitz of the Democracy Collaborative,
creative thinkers come together to explore the exciting ideas and
projects that are shaping the philosophical and political vision of
the movement that could take our economy back.
According to both the Mayan and Hindu calendars,
2012 (or something very close) marks the transition from an age of
darkness, violence and greed to one of enlightenment, justice and
peace. It’s hard to see that change just yet in the events relayed
in the major media, but a shift does seem to be happening behind the
scenes; and this is particularly true in the once-boring world of
banking.
In the dark age of Kali Yuga, money rules; and it
is through banks that the moneyed interests have gotten their power.
Banking in an age of greed is fraught with usury, fraud and gaming
the system for private ends. But there is another way to do banking;
the neighborly approach of George Bailey in the classic movie It’s
a Wonderful Life. Rather than feeding off the community,
banking can feed the community and the local economy.
Today, the massive too-big-to-fail banks are
hardly doing George Bailey-style loans at all. They are not
interested in community lending. They are doing their own proprietary
trading—trading for their own accounts—which generally means
speculating against local interests. They engage in high-frequency
program trading that creams profits off the top-of-stock market
trades; speculation in commodities that drives up commodity prices;
leveraged buyouts with borrowed money that can result in mass layoffs
and factory closures; and investment in foreign companies that
compete against our local companies.
We can’t do much to stop them. They've got the
power, especially at the federal level. But we can quietly set up an
alternative model, and that's what is happening on various local
fronts.
Most visible are the Move Your Money and Occupy
Wall Street movements. According to the Web site of the Move Your
Money campaign, an estimated 10 million accounts have left the
largest banks since 2010. Credit unions have enjoyed a surge in
business as a result. The Credit Union National Association reported
that in 2012, for the first time ever, credit union assets rose above
$1 trillion. Credit unions are non-profit, community-minded
organizations with fewer fees and less fine print than the big
risk-taking banks, and their patrons are not just customers but
owners, sharing partnership in a cooperative business.
Move “Our” Money: The Public Bank
Movement
The Move Your Money campaign has been wildly successful in mobilizing people and raising awareness of the issues, but it has not made much of a dent in the reserves of Wall Street banks, which already had $1.6 trillion sitting in reserve accounts as a result of the Fed’s second round of quantitative easing in 2010. What might make a louder statement would be for local governments to divest their funds from Wall Street, and some local governments are now doing this. Local governments collectively have well over a trillion dollars deposited in Wall Street banks.
A major problem with the divestment process is
finding local banks large enough to take the deposits. One proposed
solution is for states, counties and cities to establish their own
banks, capitalized with their own rainy day funds and funded with
their own revenues as a deposit base.
Today only one state actually does this: North
Dakota. North Dakota is also the only state to have escaped the
credit crisis of 2008, sporting a sizeable budget surplus every year
since. It has the lowest unemployment rate in the country, the lowest
default rate on credit card debt, and no state government debt at
all. The Bank of North Dakota (BND) has an excellent credit rating
and returns a hefty dividend to the state every year.
The BND model hasn’t yet been duplicated in
other states, but a movement is afoot. Since 2010, 18 states have
introduced legislation of one sort or another for a state-owned bank.
Values-based Banking: Too Sustainable to
Fail
Meanwhile, there is a strong movement at the
local level for sustainable, “values-based” banking—conventional
banks committed to responsible lending and service to the local
community. These are George Bailey-style banks, which base their
decisions first and foremost on the needs of people and the
environment.
One of the leaders internationally is Triodos
Bank, which has local offices in the Netherlands, Belgium, the United
Kingdom, Spain, and Germany. Its Web site says that it makes socially
responsible investments that are selected according to strict
sustainability criteria and overseen by an international panel of
“stakeholder” representatives representing various community,
environmental, and worker interest groups. Investments include the
financing of more than 1,000 organic and sustainable food production
projects, more than 300 renewable energy projects, 33 fair trade
agricultural exporters in 22 different countries, 85 microfinance
institutions in 43 countries, and 398 cultural and arts projects.
Two U.S. banks exemplifying the model are One
PacificCoast Bank and New Resource Bank. Operating in California,
Oregon and Washington, One PacificCoast is comprised of a sustainable
community development bank with around $300 million in assets and a
non-profit foundation (One PacificCoast Foundation). Its commercial
lending business focuses on such sectors as specialty agriculture,
renewable energy, green building, and low-income housing. Foundation
activities include programs to “help eliminate discrimination,
encourage affordable housing, alleviate economic distress, stimulate
community development and increase financial literacy.”
New Resource Bank is a California based
B-corporation (“Benefit”) with $171 million in assets, which
focuses its lending and banking services on local green and
sustainable businesses. New Resource was recognized in 2012 as one of
the “Best for the World” businesses, being in the top 10 percent
of all certified B-Corporations and scoring more than 50 percent
higher than 2,000 other sustainable businesses in overall positive
social and environmental impact.
All this might be good for the world, but isn’t
investing locally in a values-based bank riskier and less profitable
than putting your money on Wall Street? Not according to a study
commissioned by the Global Alliance for Banking on Values (GABV). The
2012 study compared the financial profiles between 2007 and 2010 of
17 values-based banks with 27 Globally Systemically Important
Financial Institutions (GSIFIs)—basically the too-big-to-fail
banks, including Bank of America, JPMorgan, Barclays, Citicorp and
Deutsche Bank. According to the GABV report, values-based banks
delivered higher financial returns than some of the world’s largest
financial institutions, with a return on assets averaging above 0.50
percent, compared to just 0.33 percent for the GSIFIs; and returns on
equity averaging 7.1 percent, compared to 6.6 percent for the GSIFIs.
They appeared to be stronger financially, with both higher levels of
and better quality capital; and they were twice as likely to invest
their assets in loans.
CDFIs
Along with the values-based banks, community
investment is undertaken in the United States by Community
Development Financial Institutions (CDFIs), including community
development banks, community development credit unions, community
development loan funds, community development venture capital funds,
and microenterprise loan funds. According to the CDFI Coalition,
there are over 800 CDFIs certified by the CDFI Fund, operating in
every state in the nation and the District of Columbia. In 2008 (the
last year for which a report is available), CDFIs invested $5.53
billion “to create economic opportunity in the form of new jobs,
affordable housing units, community facilities, and financial
services for low-income citizens.”
Two of many interesting examples are the
Alternatives Federal Credit Union and Boston Community Capital.
Alternatives FCU, located in Ithaca, New York, is committed to
community development and social change and is part of the
Alternatives Group, which includes a non-profit corporation
(Alternatives Community Ventures); a 40-year old trade association of
community groups, cooperatives, worker-owned businesses and
individuals (Alternatives Fund); and a not-for-profit organization
that facilitates secondary capital investment in the credit union
(Tomkins County Friends of Alternatives, Inc.). The credit union has
over $70 million in assets and offers many innovative financial
products, including individual development accounts—special savings
accounts for low-income residents that offer matching deposits of two
to one up to a certain amount—in addition to more traditional
services such as loans for minority and women-owned businesses, and
affordable mortgages. The credit union also offers small business
development (classes, seminars, consultation, and networking
programs), free tax preparation, and a student credit union.
Although its lending programs focus on
lower-income borrowers, Alternatives FCU has had lower delinquency
and charge-off rates than many major banks that avoid these types of
customers. Boston Community Capital (BCC) is a CDFI that is not
actually a bank but invests in projects that provide affordable
housing and jobs in lower-income neighborhoods. BCC includes a loan
fund, a venture fund, a mortgage lender, a real estate consultation
organization, a solar energy fund, and a federal New Markets Tax
Credit investment vehicle. Since 1985, it has invested over $700
million in local organizations and businesses. These funds have
helped build or preserve more than 12,800 affordable housing units,
as well as child care facilities for almost 9,000 children and
healthcare facilities that reach 56,000 people. Their investments
have helped renovate 850,000 square feet of commercial real estate,
generate 5.9 million KW hours of solar energy capacity, and create
more than 1,500 jobs.
Less Money for Banks and More for
Workers: The Models of Germany and Japan
Values-based banks and CDFIs are a move in the
right direction, but their market share in the U.S. remains small. To
see the possibilities of a banking system with a mandate to serve the
public, we need to look abroad.
Germany and Japan are export powerhouses, in
second and third place globally for net exports. (The U.S. trails at
192nd.) One competitive advantage for both of these countries is that
their companies have ready access to low-cost funding from
cooperatively owned banks.
In Germany, about half the total assets of the
banking system are in the public sector, while another substantial
chunk is in cooperative savings banks. Germany’s strong public
banking system includes 11 regional public banks (Landesbanken) and
thousands of municipally owned savings banks (Sparkassen). After the
Second World War, it was the publicly owned Landesbanks that helped
family-run provincial companies get a foothold in world markets. The
Landesbanks are key tools of German industrial policy, specializing
in loans to the Mittelstand, the small-to-medium size businesses that
drive the country’s export engine.
Because of the Landesbanks, small firms in
Germany have as much access to capital as large firms. Workers in the
small business sector earn the same wages as those in big
corporations, have the same skills and training, and are just as
productive. In January 2011, the net value of Germany’s exports
over its imports was 7 percent of GDP, the highest of any nation. But
it hasn’t had to outsource its labor force to get that result. The
average hourly compensation (wages plus benefits) of German
manufacturing workers is $48—a full 50 percent more than the $32
hourly average for their American counterparts.
In Japan, the banks are principally owned not by
shareholders but by other companies in the same keiretsu or
industrial group, in a circular arrangement in which the companies
basically own each other. Even when there are nominal outside owners,
corporations are managed so that the bulk of the wealth generated by
the corporation flows either to the workers as income or to
investment in the company, making the workers and the company the
beneficial owners.
Since the 1980s, U.S. companies have focused on
maximizing short-term profits at the expense of workers and
longer-term goals. This trend stems in part from the fact that they
are now funded largely by capital from shareholders who own the
company and want simply to grow their returns. According to a 2005
report from the Center for European Policy Studies in Brussels,
equity financing is more than twice as important in the U.S. as in
Europe, accounting for 116 percent of GDP compared with 62 percent in
Japan and 54 percent in the eurozone countries. In both Europe and
Japan, the majority of corporate funding comes not from investors but
from borrowing, either from banks or from the bond market.
Funding with low-interest loans from
cooperatively owned banks leaves greater control of the company in
the hands of employees who either own it or have much more say in its
operation. Access to low-interest loans can also slash production
costs. According to German researcher Margrit Kennedy, when interest
charges are added up at every level of production, 40 percent of the
cost of goods, on average, comes from interest.
Globally, the burgeoning movement for local,
cooperatively owned and community-oriented banks is blazing the trail
toward a new, sustainable form of banking. The results may not yet
qualify as the Golden Age prophesied by Hindu cosmology, but they are
a major step in that direction.
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