Banking and the New Economy

The economic recession and near collapse of Wall Street are things that have been on most Americans’ minds as of late. Consuming a smaller, though steadily growing proportion of people are creative constructions aimed at fixing some of these massive problems. One such notion, gradually coming to be known in progressive circles as the “New Economy,” encompasses many connected trends. Though the term is new and still loosely defined, it ranges from referring to a new financial system to focusing on local—for food, farms, and business, to intentional living, the new “slow” movements—in short, perhaps, a big progressive pie in the sky. In this paper I will look at the financial component of the new economy, specifically at the emergence of new and sustainable banking institutions, as the glory days of the big banks and investment institutions seem to be numbered.

The economic collapse in this country has been attributed to many causes—from the exotic financial instruments being traded on Wall Street, to the egregious executive salaries and bonuses, to predatory lending and the subsequent writing of bad loans. Though these are most likely all important pieces of the problem, a fundamental component underlying these issues is the chasm disconnecting the financial industries from the productive labor force that once fueled this country and its people. One element of this is illustrated by the incredible sprawl of the banking industry today. Far from capitalism’s forefather, Adam Smith’s vision of “a world of local market economies populated by small entrepreneurs, artisans, and family farmers with strong community roots engaged in producing and exchanging goods and services to meet the needs of themselves and their neighbors,” (Korten 13) today’s banks and investors have no real “investment” in the businesses and individuals that they invest in.

Due to the geographic distance, the trend of day trading, and the bundling of assets into marketable securities, the people who own the rights to businesses and loans may have no idea who holds the other side of the title. In his piece on small banks, Zach Carter explains, “the short-term interests of [Wall Street] shareholders are rarely attuned to the well-being of the communities where banks operate”(35). Furthermore, money is stripped out of communities, from local workers and businesses through these financial arrangements, and funneled, through Wall Street, into the pockets of a very small wealthy elite (Schwartz 30).

In the midst of these shifts, the focus of these banking institutions has been no longer to provide a service to local members of their communities, but instead to operate as any other corporation, prioritizing the return to shareholders. While capitalists will endlessly exhort the principles of turning a profit, as well as growing and morphing to keep up with the demands of a shifting market economy, the average working citizen is left, no longer able to get a reasonable loan, or protect and grow a meager retirement fund. Like many other corporations, banks are guilty of a dire mistake. Charles Handy explains, “to turn shareholders’ needs into a purpose is to be guilty of a logical confusion…The purpose of a business is not to make a profit. Full stop. It is to make a profit so that the business can do something more or better” (Handy 48).

A solution to this problem with banks is emerging in the form of new, smaller financial institutions, specifically credit unions and community development banks. Though credit unions have been around since 1934 (originally chartered by FDR to “make credit available to ‘people of small means’”) they now provide a safe haven to conscious consumers, wanting to put their money where their hearts are (Hofheimer). Limited by legislation regulating membership as well as nonprofit status regulating profits, credit unions have often gone under the radar of the mainstream banking citizen (Carter 35). Though viewable as the constant underdog, credit unions solve a longstanding business problem, that of the tension between serving the needs of the consumer versus the demands of the shareholder. It accomplishes this, like many worker collectives and cooperative organizations, by making its member-consumers into its owners. This has the dual effect of both lessening the chasm between the financial services industry and the productive efforts of a community, while also keeping funds in a community by returning them to its member-owners in the form of dividends and discounts.

Another promising banking institution is what is sometimes known as a “community development bank.” These banks differ from credit unions in that they are not non-profit and so are enabled to turn a greater profit. What also distinguishes these banks from the big box banks now crumbling on Wall Street is that they are chartered with the intention of building and serving their local communities. An example of this is Portland’s own Albina Community Bank, which explains in its 2008 Annual Report that along with 57 other banks, it is certified by the U.S. Treasury as a Community Development Financial Institution and that “this certification enables [them] to offer a wide range of competitive banking solutions, while also promoting community development through products, services, and deposit accounts that build the local neighborhoods” (Albina 1). Similarly, in his design of “Common Good Banks,” William Spademan sees turning a profit as an important way that banks can give back to their communities in the form of charitable contributions (Carter 35).

If these sustainable and innovative forms of banking already exist, why then, is the United States teetering on the edge of economic collapse? One reason for this is that small banking institutions such as credit unions and community development banks are not accessible and marketable to the mainstream for the very reasons that make them the important institutions that they are. They are small. They are community based. They spend what profits they generate giving back to their communities instead of prioritizing sophisticated marketing campaigns or new product development. In fact, were these institutions to take on qualities of the big banks, spreading across the nation and turning customers into numbers on balance sheets, what would set them apart? Without the sustained focus on local community development, how could community development banks justify their existence? What would credit unions be without their unions?

It is with these questions that banks, along with all other participants in the forging of the new economy must grapple. Even with a focus on serving the members their communities, banks are businesses, and whether incorporated as for-profit or non-profit, they will always have to prioritize effective management, sound fiscal health, and returns to their investors. Institutionalizing local communities or member owners as the beneficiaries of their profits is one important step in the direction of a new economy.

Works Cited

Albina Community Bancorp. Annual Report. Portland: Albina Community Bancorp, 2008.

Carter, Zach. “Small Banks, Radical Vision.” Yes: Building a Just and Sustainable World 50 Summer 2009: 34-35. Print.

Handy, Charles. “What’s a Business For?” Harvard Business Review Dec. 2002: 46-51. Print.

Hofheimer, George. “Capitalism Needs Cooperation.” Washington Credit Union News. waleague.org, 15 July 2009. Web. 17 Nov. 2009.

Korten, David. “Beyond Bailouts, Let’s Put Life Ahead of Money.” Yes: Building a Just and Sustainable World 48 Winter 2009: 12-15. Print.

Schwartz, Judith D. “Dollars with Good Sense.” Yes: Building a Just and Sustainable World 50 Summer 2009: 30-32. Print.