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How the 99 Percent Can Invest in Main Street, Not Wall Street
Chelsea
Green
introduction
Throughout most of the day on May 6, 2010, stocks on the major exchanges
were faring poorly. Western banks had decided to cut off credit to Greece.
This was a huge turnaround. A decade earlier, a huge opportunity was
seen in extending cheap credit to millions of Greeks who were long accustomed to stashing cash in their pillows and loaning exclusively to relatives.
Ignoring their own history at Troyto beware of strangers bearing gifts
the Greeks acceded to Western bankers, and their appetite for credit grew
into the same addiction that now afflicts almost every developed economy in
the world. Like the millions of Americans whose credit cards are now unpayable, the Greeks, by May 2010, had become unbankable.
Foreseeing a wave of bankruptcies that could shake up the global economy,
investors on May 6 were now moving their money out of corporate stocks
and into safer financial instruments like bonds, CDs, and cash. By the early
afternoon, the value of the New York Stock Exchange and the NASDAQ had
shrunk by 3 percent. Shortly after 2:30 pm Eastern Time, investors noticed
that the already slumping curves on their computer screens were suddenly
spiking downward. Stocks were down 4 percentno, 5 percent. Stop orders
(in which traders automatically seek to sell securities losing value) submitted hours, days, or even weeks earlier were suddenly executed. But because
there werent enough buyers for the sellers, prices continued to plunge, and
panic ensued. Minus 6 percent, minus 7 percent, minus 8 percent.
On the trading floor of the New York Stock Exchange, The New York
Times reported the next day, traders shouted or watched open-mouthed as
the screens lighted up with plummeting prices and as phones rang off the
hook. It was almost like The Twilight Zone, said Theodore R. Aronson of
Aronson, Johnson & Ortiz, a money management firm in Philadelphia.1
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Some traders wondered if their eyes had failed themmaybe the 8 was
really a 3. But their vision was perfect. Some stocks suddenly lost nearly all
their value. Accenture Corp., which had been trading at $40 per share, was
down to a penny in minutes. Where would it end? Investors stared at their
monitors with dismay and saw their wealth and their dreams disappear.
Then at around 2:45 pm, as if the finance fairies had finally descended,
the markets began to rebound. Minus 7 percent, minus 6 percent. Investors
caught their breath, thinkingwell, hopingmaybe this was a fluke. Minus
5 percent, minus 4 percent. And thats more or less where things stood still
until the markets closed at 4:00 pm.
The Securities and Exchange Commission (SEC) hastily called emergency
meetings of the exchange leaders to sort out what had caused the meltdown.
Were there bugs in the computer programs? Had a few big hedge fund transactions triggered the sudden collapse? Were there appropriate brakes in place
to prevent calamities like this from happening again? Should preposterous
transactionslike those yielding a 10,000 percent return in three minutes
be undone? What was not on the tablebut definitely on the minds of
millions of Americanswas whether we should continue to rely on a system
where our life savings could vanish in literally seconds.
Over the past three years, investorsranging from the biggest hedge fund
managers like George Soros to modestly investing pensionershave been
on a terrifying roller-coaster ride. For a few months in late 2008 and early
2009, the global economy teetered on the abyss. What started as a modest
tempest, with several billion dollars of housing loans going bad, intensified
into a Category Five hurricane. Various financial instruments that had leveraged these loans, such as the now infamous credit default swaps (CDSs),
became worthless. Investment giant Lehman Brothers went bust, and the
insurance titan AIG almost followed. Many other large banks teetered on
the brink. Only through the intervention of both the outgoing and incoming
presidential administrations, as well as an unusually united Congress, were
they saved through what became known as TARPthe Toxic Assets Relief
Program. Millions of Americans were not as lucky and lost their homes, and
one out of four found themselves underwater, owing more on their mortgages than their houses were now worth.
By 2010, the crisis appeared to ease a bit. Stock markets regained some
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Introduction | xix
of their value, and some regions saw home values stabilize; but the official
unemployment rate hovered ominously between 9 and 10 percent despite
nearly a trillion dollars of government stimulus. Congress assembled a new
package of financial reforms to prevent a repeat. And a consensus emerged
that the worst of the crisis was over. Until May 6.
Some financial crises pass quickly. The 1987 stock market crash was like
that, and by the late 1990s a new generation of day traders was convincing analysts like James Glassman and Kevin Hassett to title their book Dow
36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market.
The country also recovered in a few years from the popping of the tech
bubble in the late 1990s. But this crisis is different. Millions of Americans are
seriously asking whether they can continue to entrust their retirement and
their kids education to such a rickety financial system. They want to put
their money to work in the enterprises they know and care about. They want
to invest in their own schools, hospitals, factories, and homes. For the first
time in generations, they are thinking about how to invest locally.
The financial experts running Wall Street insist this is silly. Local businesses
that is, those connected to a particular place and owned by geographically
proximate membersare unreliable, the backwater of the old economy, not
the places where serious investors should place their money. But what truly
has become ridiculous is continuing to pour our hard-earned dollars, month
after month, into global businesses and stock market casinos that increasingly bear no relationship to our own prosperity. Real prosperity must begin
at home.
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life insurance funds, and at the end of 2010 these totaled about $30 trillion.
To put this number in perspective, all the production in the United States
each yearthe gross domestic product (GDP)currently totals about $15
trillion. So Americans have double their GDP in long-term savings. Not even
1 percent of these savings touches local small business.
Were local businesses uncompetitive, unprofitable, and obsolete for the
U.S. economy, this gap would be understandable. But as we will see, local
businesses are actually more profitable than larger corporationsand their
competitiveness is impressive despite decades of inattention from policymakers and economic developers. This investment gap represents a huge market
failure. It means that Americans are systematically overinvesting in Wall Street
and underinvesting in Main Street. Were this $30 trillion allocated efficiently,
at least $15 trillion would move into locally owned small businesses.
Imagine the kinds of new businesses and economic revitalization that
would be possible with a $15 trillion shift. To put this number in perspective, it represents twenty times more money than all the funding the federal
government allocated in the first national stimulus program of 20092010.
It represents about $50,000 for every American man, woman, and child. For
even a small town of five thousand, this shift would make $250 million available for starting or expanding local business. For a suburban town of fifty
thousand, it would mean $2.5 billion more of capital. For a metro area of
half a million, $25 billion more would be available.
What stands in the way of this shift is obsolete institutions and laws that
make local investment extremely difficult and expensive. Securities laws from
the Great Depression effectively enacted a system of investment apartheid,
with accredited investors being able to invest in any business they wish and
unaccredited investors being essentially told to get lost. Accredited investors
make up the richest 2 percent of Americansthose who earn more than
$200,000 (or $300,000 with a spouse) or have more than $1 million in assets,
excluding their primary residence. As long as entrepreneurs dont lie about
their business plans, governance, and numbers, they can easily approach any
accredited investor for money. The other 98 percent of us are unaccredited and presumed too gullible to invest in a company without massive legal
paperwork. Before a business can make an investment offering to even a
single unaccredited investor, it must pay an attorney to produce a private
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Introduction | xxi
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Introduction | xxiii
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are enabling almost any lender to find even the smallest and most unconventional loan opportunities. Yet thus far these innovations have facilitated a
global democratic revolution not around ownership, but around debt.
Debt can be a helpful tool for entrepreneurs, but it also can be counterproductive and imprisoning. Microentrepreneurs around the world now have
IOUs from unscrupulous lenders who are charging usurious interest rates.
The same predicament confronts Americans who were pressured by fly-bynight financial institutions into taking on more credit card debt and larger
mortgages than they really could afford. Ditto for millions of residents of
Greece, Portugal, Italy, and other countries in trouble, where debtors now
have little hope of paying back their debts.
Whats now needed across the planet is microequity and other forms of local
investing that shatter the monopoly of the worlds financial elite. De Sotos
conclusion that the historically miserable state of the law in Latin America
has crippled small businesses is equally true in developed countries like ours.
Indeed, the need for overhauling investment laws and practices worldwide
could not be more urgent. The Earth is now beset by a growing number
of crises. Reasonable people can disagree about their causes and solutions,
but theres little disagreement about the mounting dangers: The climate
is changing. Once plentiful supplies of cheap petroleum are running out.
Species are disappearing at an accelerating pace. Fish stocks in the worlds
oceans are being exhausted. Farmland and prime topsoil are fast disappearing. Weapons of mass destruction are spreading into more hands. The freer
global movement of goods and services means the freer global movement
of germs, migrants, and terrorism. All of these dangers will intensify as
the number of people placing demands on the worlds resources grows, as
expected, to eight billion people by 2025.
What can we do about a world that is slipping into an epoch of unprecedented instability? To a growing number of people, the answer is to go local:
Make my community more resilient and help other communities globally do
the same. William Rees, one of the architects of the concept of an ecological
footprint, defines resilience as the capacity of a system to withstand disturbance while still retaining its fundamental structure, function, and internal
feedbacks.3 The more communities can feed, house, educate, transport, and
care for themselves, the more they can manufacture their own goods and
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Introduction | xxv
provide their own services, and the less vulnerable they will be to the coming
financial challenges. This presents new opportunities to create and expand
local businesses to meet local needs. And seizing these opportunities requires
new local-investment tools that rechannel our savings into priorities at home.
About a decade ago, I teamed up with a dozen other people sharing these
viewsentrepreneurs, investors, policy analysts, and big-picture thinkers
to form the Business Alliance for Local Living Economies (BALLE), promoting the idea that economic power should reside locally. The term local living
economy ties together two intellectual strands. The first concerns localism,
expounded in such early works as E. F. Schumachers Small Is Beautiful (1973)
and Jane Jacobss Cities and the Wealth of Nations (1985), as well as my own
books, Going Local (1998) and The Small-Mart Revolution (2006), which made
the case that local ownership of business and community self-reliance are
key requirements for prosperous local economies. The second is from the
writings of David Korten on the importance of a living economy rooted
in smaller, more accountable businesses. In recent years, many in the BALLE
community have come to understand the critical importance of local investment, and how new practices, tools, and institutions can and should be used
to achieve what we call a living rate of returna return thats real, honest,
dependable, and modest, yet big enough to enable a prudent family to secure
reasonable income security before and after retirement and to bestow a
decent upbringing and education for its children.
When I started working in community economics in the mid-1990s,
almost no one took the field seriously. The book editor of The Washington
Post said she would not review a book like Going Local, because why would
a national audience care about local activities? At the first stop on that books
speaking tour, at the University of Kentucky, two people showed upand
one left early. I am now on the road almost half-time, speaking to three or
four dozen communities each year, and everywhere I go, whether red states
or blue states, cities or cow towns, hundreds of people show up eager to talk
about their local economy. Any doubts about the penetration of the buylocal movement were put to rest when Time magazine put on its March 12,
2007 cover, Forget Organic, Eat Local. The movement for local purchasing
is fast evolving into a movement for local investingwhich is why I recently
created, with two colleagues, a new consulting company called Cutting Edge
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Introduction | xxvii
look at the creative ways cooperatives are borrowing from their members
and reinvesting their members capital in other local businesses.
Chapter 4, on Institutional Lending, explores the cutting edge of business borrowing. Keenly aware that local banks and credit unions are much
better at investing in local business than are global banks, millions of
Americans have recently moved their money. Others have entered partnerships with their local depositories to create special certificates of deposit
(CDs) to collateralize targeted small-business loans. We also see how municipal bonds (slow munis) and state-owned banks like North Dakotas can
catalyze more local business lending.
Chapter 5, on Anti-Poverty Investing, looks at the field of community
development, which has been one of the principal sources of local-investment innovation since the 1960s. Funded largely by government agencies,
foundations, do-good banks, and philanthropists, the activities in this field
include community-development corporations, microenterprise lending,
community-development venture capital funds, and state-financed job funds.
These initiatives, once dismissed as charitable aberrations, are increasingly
being seen as a lucrative market niche for creative local investors.
Chapter 6 is titled If I Were A Rich Man . . . and looks at the remarkable
options available to accredited investors. We will visit a holding company in
the Pacific Northwest, Upstream 21, where investors can support an evolving
network of local businesses. Well see the work of local-investment angels
in the small town of Fairfield, Iowa, with so many start-ups its called Silicorn
Valley. Well see how a green restaurateur in Oakland raised money from
local accredited investors.
Chapter 7 focuses on Unaccredited Investing in SEC-Land. It looks
at creative investment strategies local businesses have deployed to avoid
or reduce the costs of securities law compliance. Some businesses like
Awaken Caf in Oakland are pre-selling coffee to raise money for a new
store. Others are tapping into crowdfunding donations and micropatronage through websites like Kickstarter and IndieGoGo. A community
organization, LION, in Port Townsend, Washington, builds relationships
among local investors and entrepreneurs. My partners at Cutting Edge
Capital are lowering the costs of direct public offerings through simple,
fill-in-the-blanks forms.
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Chapter 8 looks at the Holy Grail for local investing: the deployment of
Local Exchanges, Internet-based spaces where unaccredited investors in a
community can trade local securities. Once operating, these exchanges will
allow the creation of diversified local portfolios, local mutual funds, and local
pension funds. We will learn about the history of stock exchanges from John
Katovich, who until recently was a senior vice president of the NASDAQ. We
will see a glimpse of the future at Mission Markets, which is prepared right
now to deploy such exchanges with state and local partners. And we will look
at low-budget, grassroots approaches to local stock markets in Pennsylvania
and California.
Chapter 9 discusses how local investors might start pooling together to
diversify their riskshence the title Everybody into the Pool! We will
glimpse several models of revolving loan funds that are supporting local
business. We will see exciting possibilities for creating local mutual funds,
local pension funds, and local business-development companies (pools of
small businesses). We will learn about the No Small Potatoes Investment
Club in Maine, where unaccredited investors can make loans to local food
businesses.
Chapter 10, Investing in Yourself, shows the superior returns that come
from investing in ones own bank, home, energy efficiency, and a panoply
of other personal needs. For many Americans, perhaps even most, these
opportunities are so big and compelling that they might never need to think
about their IRAs or retirement funds again. Finally, we will see how anyone,
even an unaccredited investor, can take control over his or her investment life
through a self-directed IRA.
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Introduction | xxix
of the first local stock exchange, for example, may or may not say anything
significant about likely performance of its successors.
This book is built upon several dozen interviews conducted between July
2010 and July 2011. My colleague Kate Poole and I transcribed the interviews,
scrubbed out the uhs and redundancies, and asked each interviewee to make
sure we captured accurately what he or she had said. Most described investment tools they were pioneering or using somewhere; in a few instances we
interviewed people who had ideas for great local-investment tools in the future.
Even though you will find lots of numbers in these pagesall of them
triple-checkedI encourage you to treat all of them with skepticism, especially various claimed rates of return. Mainstream investment practitioners
have developed numerous tricks for exaggerating their performance, as will
be seen in chapter 1, and it has taken years to put in place reliable metrics
to hold them even remotely accountable. It will be many more years before
we really understand how well local-investment tools work, in what circumstances, and with what risks.
What can be said with confidence is that the era of individuals, families,
and communities depending exclusively on the Rube Goldberg machine we
call Wall Street is over. We are seeing the beginnings of a fundamentally
new approach to investing and managing our wealth. Because local businesses in the United States have been severely undercapitalized and many are
highly profitable, some of the early pioneers could hit the jackpot. As more
and more of us see backyard investment opportunities that are working and
thriving, others will follow. What might first appear to be a trickle of funds
going into local business could soon burst into a torrent.
What will happen when the first, say, trillion dollars of the unaccredited
publics money moves from Wall Street to Vall Street? Obviously, this will
benefit many local businesses. But what happens when a trillion dollars is
withdrawn from the New York Stock Exchange and the NASDAQ? Fortune
500 companies, long kept superficially healthy through automatic pension
fund investments, will see the prices of their shares plummet and their assets
shrink. More mainstream investors will worry and look to local alternatives,
which will depress prices on the stock exchanges still further. This capital
flight could occur with dramatic speed and result in the largest and most
monumental shift of money in human history.
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