An old adage in banking was known as the "Three-Six-Three" rule. Borrow money at 3%, lend it at 6%, and the banker is on the golf course by 3:00. Accurate or not, this harkens back to a simpler day in banking. Due to lax regulation, demand for higher returns, and reckless financial "innovations," big banks have become a new animal. In 2008, this new animal became a beast that nearly toppled the world economy.
Money is necessary resource for an entrepreneur to start a new small business, a first time buyer to own a home, a student afford college tuition, a housing trust fund to construct an affordable housing complex, or an independent media operator to expand – just to name a few purposes.
For decades now, money – or "capital" – has been primarily controlled by institutions. Some financial institutions, such as credit unions, community banks, and savings & loans have done a good job of directing the excess capital of a community back into the community by preferred lending there. Larger financial institutions — OK "Big Banks," — take in deposits, and the money (your money) gets integrated into their global machine and is redeployed somewhere in the world, for some purpose the depositor will never know.
Finally, the margin (the difference between the rate that the bank pays depositors – or borrows – and the rate at which the bank lends) revenues for the big banks are generally channeled back to the shareholders of the bank who likely reside all around the nation, and even the world.
The final kicker is that, banks don't even have to have all the money they lend out. No, they have what is known as a "capital requirement." This means basically that they need to keep on deposit a government-prescribed proportion of the amount of money they're lending. So, in essence, banks "create" money when they lend it. During periods of economic distress banks can find that their losses on bad loans can wipe out their capital reserves amount quite easily. In today's case, the taxpayer has come to the rescue, for better or worse.
Also, this ability to create money can help to inflate financial bubbles, as it did most recently when banks were funding sub-prime mortgages, which were a major factor in the inflation of residential real estate values in the U.S. We're all painfully seeing the result of that popped bubble today.
So, how can we create a new capital lending structure which would minimize or eliminate the control of profit-focused big banks over the process? How can we direct our communities' financial resources back into our communities to insure our own economic opportunity and stability? And, beyond our own community, how might we help to provide financing for global micro-enterprise loans and much-needed financing for other worthy projects?
New alternatives are available today which allow local savers and investors to establish lending relationships with other local residents for the purpose of real property mortgages, small business loans, student loans, and even regular old personal loans.
Of course, any of these things would have been possible in the past whenever interested parties might agree on the terms and logistics of such loans. And, the devil is not only in the details, but also in the implementation and legal framework involved. I urge all readers to approach lending their hard-earned money with great caution. Lending relationships must be entered into with air-tight documentation and legally binding terms. Neglecting this can lead to tragic financial blow-ups.
There are now reasonably priced services available which will not only draft the legal agreements for all of the loan-types mentioned above, and will calculate payment schedules, amortization and even payment collection and processing. There are several companies now offering these services. Prosper.com is among the better established and better known such companies.
For those of us who may wish to lend funds for the purpose of supporting innovative social enterprise programs, there are now financial vehicles available which work very much like traditional bonds. But, the money raised is lent to a wide range of organizations, including organic agricultural co-ops, fair trade organizations, affordable housing trusts, independent media ventures, and even back into community banks and affordable housing providers right here in California.
At our socially responsible investment (SRI) firm, we favor the Calvert Notes through which we can invest money in all of the above areas, and conveniently hold the Notes right in a regular brokerage account. The Notes are issued and managed by the non-profit Calvert Foundation.
But, what about stock investments – how can we create local stock markets? We in SRI today are monitoring developments carefully and advocating for more localized versions of our present global stock market system.
There are significant regulatory, legal and logistical hurdles to overcome, and meaningful progress in this direction will be hard won, though inroads are being created as organizations such as Mission Markets. Until then, we continue to use rigorous Environmental, Social and Governance (ESG) criteria and selecting long-term equity investments for those willing to accept more risk and potential growth over time.
The innovations described here represent giant leaps in local investing and saving over what was possible even a few years ago. We are hopeful and expectant that new products and services will become available in the emerging green economy which will make it ever easier to keep our money local and increase our communities' financial independence.
