Tag Archives: Credit Union

Regulation and Structure: Two Paths to Reform

While lazing about the house one Sunday morning while my partner was out to lunch with a friend, I decided to take advantage of her absence to watch a documentary on the Netflix instant play (she’s not a huge fan of political or economics films, so this was a bit of a treat for me). While scrolling through the enormous selection in their database, I happened upon Michael Moore’s Capitalism: A Love Story. Now, given his propensity for ignoring nuance and shamelessly appealing to emotion, I’m generally not a huge fan of his work. However, given his influence among the statist left, I figured it’d be interesting to get a sense of his interpretation and framing of the financial meltdown, so I made a bag of pop-corn and settled in for a viewing.

All in all, I was pleasantly surprised. Sure, there were generous helpings of the shameless heart-string pulling and agenda-driven propaganda that Moore’s films are known for. However, he also does a decent job of laying out a good portion of the facts of what happened during the boom, bust, and bailouts we experienced over the last decade. In that aspect of his film, I felt like it was roughly equivalent in usefulness to Inside Job, the fantastic investigation into the financial crisis that won this year’s Academy Award for Best Documentary. Both films do a fine job of showing how the enormous fraud and subsequent politically corrupt bank bailouts played out historically; however, I also find that they fall flat in their attempts to prescribe a solution to the problems they so skilfully demonstrate.

The fixes that they advocate are representative of the overall left-liberal narrative of the financial crisis. The argument goes that, at the dawn of the millennium, the Glass-Steagall Act was repealed. This Depression-era regulation served to separate the functions of investment and commercial banks, and its repeal caused the banking sector to go on a hog-wild frenzy of complex transactions that served as a cover for an enormous wave of fraud in the mortgage market. This, in turn, resulted in an entire sector of our economy assuming the characteristics of an enormous Ponzi scheme, which came crashing down in 2008. The solution, liberals argue, is for the Federal Government to re-establish tight regulation of financial markets in order to ensure good behavior on Wall Street and prevent further calamities.

As far as it goes, I believe that this narrative has great descriptive value; the repeal of Glass-Steagall was, indeed, one of the major factors that allowed for the financial crisis to get out of control. However, I also think the purveyors of this line of reasoning fail to grasp an important piece of the puzzle. Underlying their model is the assumption that the behavior we observed during the meltdown is rooted in human nature. As a result, they believe that all financial markets will “naturally” behave in the same fraudulent manner if left unsupervised by the state.

The fatal flaw of this perspective lies in the fact that financial markets (and by extension, virtually all markets) are not primarily made up of atomized individuals, but, rather, people whose incentives and opportunities are powerfully determined by the institutions in which they are embedded. Far from being “natural” or fixed, the structures of human-created organizations can be as widely varied as the limits of the human imagination, and, in a totally free market, the ownership and incentive structures of firms would be essential factors in their performance. As a result, competition would pressure firms to organically evolve towards the structures that most appeal to consumers.

If all of that seems a bit abstract, let me provide a brief hypothetical example from the financial crisis. The Federal Government’s bailouts saved an enormous number of banks, many of which likely would have become insolvent and failed. By contrast, during the same period, only a tiny number of credit unions were in serious jeopardy, because the ownership structure of credit unions (the depositors are also the owners) steered the institutions towards more conservative, risk-averse behavior than their joint-stock cousins. Had the Feds not intervened on behalf of the banks with seven hundred billion dollars, many of those banks’ large depositors would have suffered serious losses. Furthermore, they would have noticed that their peers who’d kept their money with credit unions had not taken haircuts, and would thus subsequently view credit unions as safer places to store their deposits than banks. Credit unions would then find it easier to attract deposits, and banks would have to engage in an enormous amount of self-regulation to remain viable institutions.

As such, the effect of government regulation of financial markets (and of the economy in general) is to subsidize sub-optimally structured firms. A co-operatively owned credit union is inherently more trustworthy to a depositor than a for-profit bank, but regulations artificially level the playing field by establishing the State as a guarantor of the good behavior of banks. In good times, the shareholders of these firms reap the benefits of this subsidy; when their companies screw up, however, the whole of society often ends up paying for the inflicted damage. As a result, our economy is chock-full of firms that would succumb to more efficient, just, and trustworthy business models in a truly free market, but persist thanks to the legitimization that the state provides.

Given all of this, the proper response is not, as Moore and other liberals would have it, to create new reams of regulations. While creating temporary stability, such a regime would simply serve as a fig-leaf for the abuses and dishonesty that stems from the very structure of many presently existing businesses. Instead, we should go to the root of the problem and eliminate the entire regulatory regime. By opening up competition between different kinds of firms and forcing them to fully internalize the costs of their behavior, consumers would begin to take into account the structure of a business when deciding where to deposit their money, buy their groceries, etc. The best that regulators can hope to do is curb the worst excesses of fraudulent and exploitative behavior; by contrast, fully freeing our markets will finally provide us with the opportunity to witness the flowering of an economy that truly works for all of us, not just a handful of well-connected plutocrats.

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Patronage Refund! *or* Why Everyone in Burlington Should Be a Member of City Market.

Many of the folks I know who live in Burlington, Vermont have a mixed perception of our co-operative grocery store, City Market. Though they appreciate the convenience of the downtown location, it’s often perceived as an overpriced natural foods store which might be nice for specialty items, but would break the bank if you did the bulk of your grocery shopping there. The attitude can ultimately be summed up by the epithet that some Burlingtonians apply to the store: “Shitty Mark-up.” Recent events, however, have revealed the utter falsehood of that impression; in fact, it has gotten to the point where anyone who lives in Burlington and doesn’t do the bulk of their shopping at City Market is clearly acting against their own economic self-interest.

There are several reasons that this is so, but they all derive from the fact that City Market, unlike all of the other grocery stores in the Burlington area, is not a joint stock corporation, a partnership, or a sole proprietorship, but a consumer co-operative. When many people think of food co-ops, what often comes to mind is organic, fair-trade, expensive but high-quality food. While it is true that City Market stocks a wide variety of such items, so does Healthy Living and Fresh Market, which are not co-ops. Instead of being defined by what it sells, the core of a co-op’s identity lies in its ownership structure.

A traditional corporation is owned by shareholders, who are entitled to a share of the profits commensurate to the amount of stock they own. A consumer co-op, by contrast, is owned by its customers (or, in co-op parlance, members). Each member may only own one “share” of “stock,” referred to as equity, and that share entitles him or her to a refund of the profits that were generated by that member’s patronage. As a result, the co-op operates on a non-profit basis in relation to its member-owners.

In concrete terms, this is what that looks like:

Sweet City Market Dough

The above is a picture is the patronage refund check that I received in the mail today from City Market, which refunds the profits the co-op made on my purchases between July 1, 2009 and June 30, 2010. It breaks down as follows.  Over the course of that time period, I spent $2105.60 at City Market, and the co-op returned about 7.3% of that sum back to me.  Half of that took the form of cash (hence the check is for $76.80), and an equal amount was retained in reserve to make sure the co-op has operating cash, money to pay for capital improvements, etc.  However, I retain a claim to that sum: it (along with the retained money from previous years) is in an account under my name, and if I ever leave Burlington and close out my membership, I’ll receive that a check for the total amount.

Now, someone might object that such benefits come at the cost of a $15 per year membership fee; even if that were true, membership would still be worth it. However, the $15 yearly required payment is not a membership fee, but the payment for a piece of your share of “stock.” Each share has a value of $200, but the co-op doesn’t require new members to pay the full lump sum right away. Instead, one only has to fork over a minimum of $15 per year until the total reaches $200, after which no further payments are necessary. And, as in the case of the retained patronage refund (but unlike the fee paid to a company such as Costco), if you ever leave the co-op, you get that money back.

As such, I believe that it’s financially irresponsible for anyone living in Burlington to buy their groceries anywhere but City Market. Not only do you get a portion of money you spent there back in cash and build a bit of a nest egg in the form of your retained patronage account, but the prices for staple grocery items (even excluding the dividend) are, according to the Burlington Free Press, roughly on par with other area grocery stores. Add in the financial benefits of cooperative membership, and shopping anywhere else is literally throwing your money away. So, next time you need a gallon of milk, head over to the Customer Service counter at City Market and become a member; your credit union account will thank you!

P.S. Credit unions are also organized as consumer co-ops; why put your money in a bank someone else owns when you can own your own bank and keep the profits! A list of Vermont credit unions can be found here if you want to make the smart switch!

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A Proposal for Vermont Healthcare: VermontHealth

For generations the delivery of medical care has been a highly disputed and controversial issue in the United States.  In general, the left side of the political spectrum continuously attempts to develop government run health programs on the state and federal levels, while the political right often resists these attempts.  There are many variables to consider about this trend, including political fervor and expediency, profit motives, special interests, and human inertia.  Though it is impossible to define unified positions for the Left and Right, the conclusion can be drawn that the size, complexity and often the cost of healthcare systems have all increased.  Over the years we have seen the development of national programs such as Medicare and Medicaid, while individual states have also implemented varying government assistance programs for those in financial need.  Currently, we are witnessing one of the biggest pushes for health reform in our country’s history, with the goal to make healthcare available to all people.  While many of these programs have successfully delivered healthcare to their target populations, the fact remains that insurance companies are still heavily involved and make a profit at the expense of the tax-payer.  Cigna, Aetna, Blue Cross etc. all contract with state governments and the federal government to create plans for eligible citizens to choose from, which creates a profit that can be distributed among shareholders in the company.  This is the inefficiency that VermontHealth seeks to address, using the cooperative model of business to provide the citizens of Vermont with a local, not-for-profit healthcare option with the sole purpose of benefitting its members.  The mission is not to eliminate insurance companies completely or discourage the use of government resources; rather, it is to streamline the most effective components of those two to supplement the co-op, while keeping both the capital and control of the business within the state and in the hands of community stakeholders.

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ASR 1-17-2010

In which Miles read “The Song of the Vermonters, 1779,” we interview Emily Peyton about her platform and advocacy of the Common Good Bank, and Paul Elsasser graces us with his musical stylings…

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The “Bank Users Strike” meme starts to gain traction…

…under a different name.  From the Huffington Post:

Make a New Year’s resolution to move your money out of big banks? To that I say: Right on! Without question, financial consumers are angry at — and have lost their loyalty to — big banks. Late-night comics routinely make fun of the banks; there’s even a new iPhone app in which players try to stop “cash-hungry” bankers from wheedling more bailout money from the U.S. Treasury, according to a recent report in American Banker newspaper.

But if consumers do indeed move their money out of big banks, they would be well advised to look not only at community banks, but at the nation’s credit unions. In fact, consumers are already voting with their wallets in favor of credit unions. The data collected by my organization, (the Credit Union National Association — the industry’s trade group) shows that credit unions are on pace to post 2% membership growth in 2009. This is the fastest rate we have seen since 2001 and double the rate of U.S. population growth, bringing total credit union membership to nearly 93 million Americans. We think disenchantment with banks explains at least part — and probably a large part — of that growth in new members.

Let it be known that we did it in Vermont first :P!

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The “Too Big to Fail” Problem Gets Worse…

As I pointed out in a previous post, one of the major root causes of the crisis that kicked off the recession/depression is the fact that, once a bank reaches a certain size, it’s considered “too big to fail” by the government. This proud tradition began in 1984 when the Continental Illinois Bank failed. In a normal situation, a failed bank is taken into receivership by the FDIC and the depositors are compensated up to the maximum insured amount for their deposits (currently $250,000). That’s fine for the vast majority of individual depositors, but institutions that have parked large sums of money at that particular bank would find themselves stuck with a fat loss.

In the case of Continental Illinois, the Fed and government decided that to let it fail would destabilize many large institutions that had deposits there, resulting in systemic failure. In the short-term, the intervention was success; the banking system survived and the economy resumed its growth. In the long haul, however, that action triggered a series of developments that have led us to the situation in which we find ourselves today: standing at the edge of an economic disaster the gravity of which hasn’t been seen since the 1930s.

What the bailout of Continental Illinois did twenty-five years ago was set up a system of perverse incentives that have shaped the development of the banking industry over the course of the last few decades. Essentially, once a bank reaches a certain size (what that exact size is is a bit hazy, so the bigger the better), it is assumed that the bank is considered “too big to fail” (TBTF) by the government. As such, large deposits (above the FDIC maximum) in those institutions are treated as safer than deposits in “small enough to fail” (SETF) banks since the government is implicitly assuming the risk in the former case, but the depositor is assuming the risk in the latter case.

The effect of this state of affairs it two-fold. First, TBTF banks can pay lower rates of interest on deposits than SETF banks because they don’t have to pay their depositors a premium to cover the eventuality that the deposits won’t be honored in the case of institutional failure. Second, it incentivizes the consolidation of the banking industry because two SETF banks that merged to create a TBTF bank would create a whole that is more valuable that the total of its parts. Both of these dynamics have been playing out at a breakneck pace since the bailouts started. In 2007 TBTF banks (with $100 Billion in assets or greater) paid 0.08 percentage points less for borrowing, while that has almost quadrupled to 0.34 percentage points today. Dozens of small banks have failed, and many more have been snapped up by their larger competitors, flush with TARP money. According to a stunning article from the Washington Post, 2/3 of all credit cards and 1/2 of all mortgages are now issued by three companies: Citigroup, Bank of America, and J.P. Morgan Chase.

We’re essentially seeing the consolidation of a government-backed monopoly cartel that is in control of the majority of our economy’s financial system. This is a disastrous prospect for all of us save a small group of oligarchs, who will continue to fatten their wallets from both direct government largess and the ability to monopoly price credit. The rest of us will face higher real interest rates, negligible or negative return on our own savings, and the horrors of an increasingly centralized economy. To truly address this problem is a great task, but there is a simple thing you can do to get started. If you have a bank account, close it out, go to a credit union, and open an account. Small community banks, because they are owned through the Joint Stock Corporation model, can, have been, and will continue to be sucked into this To Big To Fail vortex. Credit Unions, due to their structure as consumer cooperatives *cannot* be bought (that’s not hyperbole…their structure precludes the possibility). That way, at least your savings will not be contributing to the destructive public/private central financial oligopoly that is congealing like a tumor at the heart of our economy. There are other benefits to credit union membership as well; check out the below video.

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A new article on the Free Press Supports the Credit Union Alternative to the Too Big To Fail Banks

Why isn’t Obama turning to the Credit Unions?
by Bob Fitrakis & Harvey Wasserman
May 12, 2009

As hundreds of our hard-earned billions are being poured into corrupt, greed-driven, lethally inefficient banks, the Administration, Congress and corporate media have studiously avoided the one sector of the banking industry that actually works—the credit unions.

Throughout the United States there are hundreds of these people-powered banks that have succeeded and prospered while all around them the traditional banking has collapsed into ruin, taking our general economy with them.

Why?

Because unlike those private banks, the America’s 10,000 not-for-profit credit unions are controlled by the people who deposit their money there. Loans are made only to members. The deposits are federally insured, and investments are monitored by the depositors and, allegedly, by federal regulators.

For the most part, their decisions are made democratically. Their boards of directors are elected. Increasingly those decisions have been oriented funneling resources into new green industries whose future is bright, and that actually serve that public rather than raping it.

To be sure, there are those credit unions that are plagued with problems. Like all institutions, they all have their flaws. As creatures of the democratic process, they are capable of making wrong decisions while driving those involved stark raving mad.

But by basic mandate, credit unions are ACCOUNTABLE, a concept almost completely lacking from those mega-banks “too big to let fail.”

In fact, Obama’s fiscal 2010 budget contains $234.6 billion in Community Development Financial Institution funds. Some $113 billions is earmarked for “financial issues in underserved communities,” according to the Treasury Department, along with another $80 million for the new Capital Magnet Fund aimed at “enhancing investments in affordable housing opportunities for the very poorest Americans.” This money, says a May 7 Treasury Department release, “should be a boon to Credit Unions.”

The numbers are a great improvement over the Bush era. But they pale alongside the torrent of cash slushing into failed private banks.

Since the founding of the first true credit unions in Germany beginning in 1852, the institutions have spread throughout Europe, India and North America. The first came to the US in New Hampshire in 1909.

Edward A. Filene, the Boston merchant whose famous basement offered bargain clothing to working people, Basic principles include the idea that only members can borrow money from a credit union, and that the loans must be “prudent and productive.” Because loans involve the money of a close-knit group, and must be approved by members whose money is at risk, the credit unions are a model of how the banking system might be remade.

On average about 10 of the nation’s 10,000 credit unions fail each year. Because depositors’ money is federally guaranteed, they may lose their bank, but not their deposits.


Originally published by The Free Press (http://freepress.org).

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