By: Evan D. Robertson, Project Associate.
It’s almost three years since Lehman Brothers collapsed and I still don’t understand the financial crisis. I mean, sure I grasp the financial crisis on an intellectual level. I can wrap my head around the fact that the mortgage industry was operating under perverse incentives which placed monumental value on passing the risk of loaning to less than credit worthy borrowers up the value chain. And I get that once those mortgages reached the pinnacle of the value chain crafty, alarmingly intelligent investment bankers securitized those loans, repackaging them in with good loans to hide their risk. I also understand that this was an exceedingly good arrangement for everyone involved until America’s wealthy thought “You know, maybe I don’t actually need a fourth investment property” during which those less than credit worthy borrowers thought “You know, maybe I really don’t need to go for that $300,000 house. I’m happy with my apartment.” What I don’t get, and what I absolutely cannot fathom is that, even after the worst financial crisis of my existence, not a whole lot happened. Our financial industry looks eerilysimilar to the financial industry before the meltdown. Our banks are still “Too Big to Fail” and with every bank failure the industry grows ever more consolidated. Sure, we have Dodd-Frank, the Consumer Financial Protection Bureau, and hopefully a more watchful SEC and Federal Reserve. But, the question I keep asking myself is: Is there any alternative to our financial system, is there a better way?
The Slow Money Movement has but one simple goal: One million people investing 1.0 percent of their money in local food enterprises, within the next decade. The movement was founded by Woody Tasch, a former venture capitalist, who wants to create a more sustainable financial system. In order to achieve this, Tasch wishes to slow down capital so that it can nurture small, diverse sets of local entrepreneurial ventures. The Slow Money Movement accomplishes this through facilitating investment in local food enterprises, investments which often require the investor to hold a stock or bond for three to ten years at minimum. Indeed, these investments are rather illiquid and don’t pay the same returns as more established financial products. But, as Amy Cortese (author of Locavesting: The Revolution in Local Investing and How to Profit From It) would argue they offer more stable returns, give you the benefit of investing in what you know, and provide you with the pleasure to seeing where your investment is actually going and what it is going to.
Another movement, peer to peer (P2P) funding, is another financial innovation that is establishing itself. P2P funding uses the social organizing capabilities of the internet to facilitate financial transactions (loans) between everyday people. For example, a P2P funding site called Zopa allows a borrower to post the amount of money they need, the reason they need it, and gives a credit rating of the borrower. The site then allows lenders to look at the borrowers profile and make a decision on whether to loan the individual money or not. The twist is the lender isn’t allowed to lend the total amount of the loan. Let’s say a borrower is asking for $10,000. One lender would typically give anywhere from $50 to $100 requiring at least 10 to 20 other borrowers to enter the loan with the lender. This allows the lenders to give a small amount of their investment capital to the borrower, so if the borrower does indeed default the lender only looses a tiny portion of their loan. The risk of the loan is spread across a greater number of people. The default rate on Zopa loans are low, 3.0 percent for loans issued 3 to 4 years ago.
The final grassroots financial movement is the revival of an old idea, namely, bringing back local stock exchanges. It wasn’t too long ago when NYSE (New York Stock Exchange) wasn’t the only stock exchange serving investors in the U.S. Throughout the 1930’s up until 1991, the United States had a wide assortment of regional stock exchanges that allowed investors to obtain equity stakes in local businesses. LanX is a regional stock exchange currently in development. LanX describes itself as a “self-sustaining, locally governed, regional stock exchange that would match small and medium size enterprises (SMEs) in South Pennsylvania with individual and institutional investors.” The goal of the regional stock exchange movement is to better connect regular, everyday investors to local investment opportunities in their area. The hope is to provide young start-ups and business too small to get an NYSE listing with access to capital markets.
Back to my question: Is there a better way? The answer: Not quite yet. These financial movements are nascent and face great regulatory hurdles as they mature. While these movements will probably never usurp our current financial industry, these movements can certainly work alongside them allowing common investors to take ownership stakes in local businesses. And for this fact alone, they deserve to be on anyone’s radar who has an interest in developing sustainable local economies. If you would like to learn a little more about these movements the following websites are good places to start: