To many individuals and public institutions, the past few years have been financially very challenging. The financial crisis not only melted away individuals’ life savings and investments, but also the financial solvency of many local governments. You know you are a global economy when, even as a small town you are not immune to this meltdown. At a recent OECD conference on Beyond the GDP, I heard the grim proclamation by renowned United States economists that the world is no longer looking to the United States for economic policies or strategies. Instead European, Australian and Asian politicians are demanding that their economists and statisticians explain to them why people are angry; what they value; and where policies are misaligned with the true well-being of the people (a future blog will discuss this world changing event in more detail).
Unfortunately, this does not sound like our typical politicians here in the United States. In Washington State, representatives such as Jim McDermott have been exploiting technology while also having coffee with his constituencies to ask these very questions - easy ways to understand their priorities. Hopefully by thus connecting with the people, representatives will vote on legislation that represent our priorities and not that of special interests.
Yet, Congressman McDermott might be unique in this regard. Not all of us get the same sense from our representatives. In fact our middle class, veterans, college students, teachers, and others are awakening to the reality that their voices are not being reflected in State and Federal policies. If there are those of us who were surprised at the lack of outrage at what was happening in the financial world for the past 10 years such as the growing inequity and home foreclosures, rising debt and so on, we have been duly silenced by the passion and infectious spread of the Occupy Wall Street movement across the United States and the world (see this map).
What makes this reality tough to bear is the research that shows that inequity in wealth and income in the United States was no accident, but the result of very deliberate machinations at the federal level. For the past 10-15 years generously funded special interests have completely overhauled the well-intentioned regulations and finance industry practices that prior generations set up more than 50 years ago. DEMOS, a non-profit research, policy and advocacy group out of New York City offers a detailed account of these mis-aligned regulations. If you need further explanations pick up the book that I just finished reading called “What’s the Economy for Anyway” by Washington economist David Batker. It is an easy read for the non-initiated. It helps connect the dots between economic policies, lack of jobs and reduced human well-being that so many of us are experiencing.
In the 21st Century, there is a need to rebuild the strong foundations that have been laid over the past 100 years, those that have allowed this State to weather the economic meltdown much better than others parts of the country. This foundation consists of the many community banks and credit unions that have survived the global economic meltdown. Washington chartered banks manage assets of more than $47 billion. According to the Federal Deposit Insurance Commission (FDIC), the federal agency overseeing banks with assets less than $10 billion, 16 banks in Washington State have failed since January 2009 (Minnesota had 18; California 39; Illinois 50; Florida 57 and Georgia had 72). In Washington State the failures can be directly attributed to the failure of the sub-prime fiasco that caused a countrywide housing market collapse. This crippled developers’ ability to refinance their outstanding loans through small community banks, in effect causing several banks to fail.
Notwithstanding these failures, small community banks offer a level of financial resilience that cannot be offered by large international banks, as we found out in 1989 (S&L scandal), 2000 (dot com bust) and again in 2007 (sub-prime mortgage failure). However, to lay the foundation of a sustainable economy comprising community banks and credit unions to compliment large national banks, we have to work with our State representatives to make sure that all precautionary measures are in place to reduce the chances of any future failures. In the 2010 State legislative session, several key corrective measures were taken, however, there have been no studies to ensure that these measures are adequate. Secondly, individuals, state institutions, local and county governments can also invest in community banks and credit unions rather than funding the national banking system. These banks offer competitive interest rates and a stable economic climate that can become the backbone of a full economic recovery in Washington State.
Lastly, we can work with community banks and credit unions to make sure that investing in local businesses and helping start up new businesses are priorities, rather than investing in out of state opportunities. This will doubly insure that valuable Washington State dollars are recirculated in a manner that benefits state residents and businesses. Moreover, new and revived businesses will generate new sales taxes for state coffers.
While our individual reinvestments into these banks can make a difference, the economy can be revived faster through the participation of the very affluent in the State. In order to be able to loan, these banks are required to demonstrate that 15% of their loans are matched by guaranteed capital assets. Last year, Washington State had 226,000 millionaires. Furthermore, ten of the world’s top 900 billionaires reside in this State and have assets that add up to $105 billion. What if all these residents banked only 0.035% of their assets in Washington State community banks? This would create the $7 billion (15% of assets) that the community banks need in new capital to start loaning again. Moreover, with the oversight of these savvy co-investors we can be assured that the new loans will have stringent criteria to prevent future failures.
This would be an important investment since it would provide the stability that many community banks need to invest into local government projects. After the first 2009 failure of a community bank in the state, new regulations require that all banks that take public funds must post 100% collateral for public deposits that are not federally insured. There are now more than five Washington chartered community banks qualified to be public depositaries. This number will only increase if private funds multiply the community banks’ access to capital.
Another strategy for encouraging dollar recirculation within the state economy is setting up an investment mechanism beyond the FDIC’s $10 billion limits. This could be in the form of a State bank; referring more to its geographic reach and commitment rather than one regulated by the state.
Similar to the tax dollar federal bailouts of large banks, that was tied to an obligation to repay the government, a State bank could offer key collateral for private entities in Washington State to invest some of their revenues for recirculation and credit support of new businesses in the State. The interest from investment into state businesses could be shared between private investors and public partners. Bill 1320 that was introduced the past year had opposition from expected quarters, such as large banks. However, setting up a State bank is more a function of the private investment sector in Washington State and less a legislative initiative. Once the bank is established, the state can choose to move its tax revenues from Bank of America (a fee-income based bank that does not serve the average resident) to a State bank that can be based on an income-fee driven bank model. Big banks are also susceptible to collapse, and even the future of Bank of America has come into question recently. While the focus in Olympia remains on cutting, eliminating and so on, the real opportunity lies in leveraging local resources that are being “leaked” to a national and perhaps international economy, with limited returns to Washington state residents.
So if you are thinking of transferring banks – act on it soon. Do your homework – ask questions and reward your community banks and credit unions by banking your money with them. Who knows, it might help re-open your corner bakery that shut down 2 years ago from a lack of credit and falling revenue. Perhaps you son could work there after school and bring some extra cash back home to you. That’s how a re-circulating economy works. Without you, it fails.