Bad Credit, Good Credit

Sept. 15, 2009 by Philip Beard

Bank local and make a real difference in Sonoma County's economy

Bad Credit, Good Credit

Money. It’s what everybody needs to run their lives. And right now, we’re all asking: How come we don’t have enough money to do what we need to do? Everybody’s in the red. The U.S Treasury, states, counties, cities, homeowners, businesses, non-profits. Our jobs are disappearing, our mortgages unpayable, our schools laying off teachers, our social services evaporating along with our 401k’s. And the big banks won’t lend us the money we need, even when our government gives it to them to lend!

WHAT’S GOING ON HERE? Why is our financial system betraying us? And even more important: What can we do about it?
Here’s the short version. Our financial system is betraying us because ever since the Federal Reserve Act of 1913, our credit has been created by private banks, and private banks put private interests ahead of the public interest. It’s not a conspiracy; it’s just their nature. Give them free rein to find more short-term profits, and that’s exactly what they’ll do, because that’s what their stockholders demand, and they’d betray their fiduciary responsibility if they didn’t comply. Clever innovators come up with high-risk derivatives, collateralized debt swaps, subprime mortgage packages, and a host of other high-finance big-profit schemes -- and the deregulated investment banks, insurance companies, hedge funds are quick to jump in, to share in the profit-taking. The result is uncontrolled money creation via fractional-reserve leverage. Huge amounts of speculative loan money get pumped into the economy.   That money represents no real value, but just casino value: global big bets. David Korten calls the trillions of dollars that originate this way “phantom wealth”.   And when the bubble bursts, we all pay the price, although most of us had nothing whatever to do with creating the bubble.
For a superb animation that explains this high-finance hokus-pokus, view it below or go to to PoeTV.   It’s high time we understood what these gamblers are doing with our money, and this video makes it entertainingly clear.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

OK, but what can we do about it? 
Here’s a first step that’s startlingly easy, yet profound in its implications: Switch all your accounts out of the corporate megabanks (B of A, Citibank, Wells Fargo…) into your favorite local bank or credit union. Take our locally-owned Exchange Bank, for instance. Unique among U.S. commercial banks, it’s been contributing 51% of its profits to student scholarships since 1948. How’s that for community involvement? Or check out Community First Credit Union. A non-profit co-operative, it’s been immune to the bad-credit woes plaguing the mainstream economy because it’s refused to invest in high-risk profit-taking. Both these institutions are founding GoLocal members, recently joined by two other local banks: Summit State Bank and First Community Bank. They deserve our active support, and the way to give it is to park your money there.
Aside from the inherent financial benefits of switching our deposits from the megabanks to our neighbors, environmental benefits accrue as well. Our neighborhood banks don’t lend money to finance coal-fired, toxic power plants; megabanks do. A clever young surfer named Kyle Thiermann has made a cool video about that, Claim Your Change.

Next we can do what North Dakota (of all places) did in 1919, which is to set up our own public-owned state bank. All revenues and expenditures of the state are processed through this Bank of North Dakota. For all these years, the BND has been financing, at low or no interest, public-benefit projects and programs: loans to foreclosure-endangered farmers, loans to students, infrastructure projects, etc. And right now, in the teeth of this devastating recession, North Dakota is one of only two states that are fiscally solvent. That sounds like a model worth emulating. What’s stopping us?
That create-your-own-credit model could work at the national level as well, of course. In fact it has done so at various times in our history, most notably in the 1860’s when Abraham Lincoln used it to finance the Civil War, rather than borrowing money from British private banks at 24% interest. What’s stopping us from doing it now?
But we’d be foolish to rely only on state and federal politicians to do the right thing. Whatever they do or refuse to do, we’ve got a more reliable option: regional credit clearing systems. These are alliances entered into freely by local governments, non-profits, businesses, and individual citizens, for the economic benefit of their shared region. The principle they operate on is this: When the banks aren’t issuing the credit we need for running our lives, we can issue it ourselves. And unlike for-profit banks, we can do it without charging an arm and a leg. (Banks call that arm and leg “interest”; it used to be called “usury”, and every religion in the world forbids it. That’s a pretty good sign that we’d do well to seek other options.) We can actually spend the credit into existence that we need to run our lives, at low or no interest. All it takes for the system to work is a critical mass of groups and individuals ready to accept this self-issued credit in full or partial payment for their goods or services, and a disciplined issuance mechanism that allows them to buy only as much value as they can sell.
Sound utopian? Maybe (gasp) anti-capitalist or something? Guess again. Check out the WIR system in Switzerland, a place not known for red-eyed radicalism or irresponsible monetary schemes. The WIR folks have existed as an independent credit clearing alliance of small and mid-sized businesses since 1934. Currently they do WIR-denominated trade to the tune of around $2 billion a year. What’s stopping us from emulating them?
The answer to these why-don’t-we-do-it questions is that nothing’s stopping us but our own ignorance. Conditioned to believe that the Federal Reserve works in our best interest, we’re ignorant of its private, for-profit status. Raised believing that only centrally-issued “legal tender” can be real, reliable money, we’re ignorant of the credit-issuing power that’s available for us to use locally, in support of our neighbors, our regional economies – in support of our own lives.
Here in Sonoma County our GoLocal Cooperative is working to adopt and promote this sustainable approach to credit.  With startup funding pledged by some major socially responsible foundations, and with enthusiastic support from our business members and progressive local government officials, we’re setting up a regional economic development model that we intend to see replicated nationwide. (To transition into it, we’ve set up the Rewards Card program described elsewhere on this site.) The model holds the promise of value-based, trustworthy economic renewal in the face of a big-bank-dominated global system that has visited economic chaos upon us and has broken our trust.

So where do we go? Inertia-driven, we can continue down the infuriating, fear-producing, same-old path of bank bailouts, ineffective federal stimulus packages, and social disintegration. Or we can embrace a sustainable, democratically controlled, collaborative approach to shaping our own economic destiny. The choice is ours. It’s high time for us to act on it.