“The financial system is not based on trust…Banks don’t trust you—that’s why they take collateral. You don’t trust the bank—that’s why we have the FDIC.” So says Robert Wright, a financial historian at New York University, quoted in Business Week’s recent article on the fallout from Bernard Madoff’s $50 billion Ponzi scheme.
This is not exactly reassuring words, and indeed there are a slew of articles about how many individuals and foundations will be ruined as a result of this. More damaging still is that this was no Jerome Kerviel, the 31-year old French trader who managed to gamble away $7 billion of other peoples’ money last winter. Not only did Madoff apparently lose about seven times more money than Kerviel (and three times what we are talking about using to bail out the auto industry), but he was about as trusted as someone can be in the apparently trustless world of banking. He was a co-founder and board chair of the NASDAQ. The NASDAQ.
A couple of weeks ago, I noted that workers and investors are natural enemies in a capitalist economy, and now it is time to look at the relationship between consumers and investors. The above quote might suggest that I think that they are enemies and that is exactly right.
This claim should be qualified somewhat. Obviously people who invest are also always people who consume, and usually they are people who work; so they can’t really be their own enemies. Rather, they are at conflict with their own interests because of how the economy is structured.
Our system is based on antagonism between the interests of those who own the financial system, and those who use its products. This antagonism is what drives regulation, which is ultimately meant to protect the consumers of services from the providers of services.
There is another way, through cooperative financial institutions in which the owners and customers are the same people. These include credit unions, which collectively have 91 million members nationwide. Instead of seeking to satisfy the whims of investors, credit unions can look to the long-term benefit of their members.
If a credit union is profitable, it is the members themselves who profit through lower fees and beneficial interest rates. Losses are also shared, of course, but so far it seems that the conservative tendency of credit unions has insulated them from the worst of the losses. Decisions tend to be made with the depositors’ interests in mind, which is especially important in times like these, when hard decisions must be made.
Credit unions are not failsafe. Some of them, like some banks, have made investments that may come back to haunt them. We also must remember that the whole financial system is so thoroughly intertwined that nothing is truly safe.
Fortunately, credit unions are protected by a cooperative version of the FDIC, called the National Credit Union Share Insurance Fund. This fund, like the FDIC, is a government-backed program to cover deposits. Unlike the FDIC, it is still financially stable, and tax dollars have never been used to bail out a credit union.
While it is much smaller than the banking industry, the cooperative banking sector is still large enough to provide a substantial alternative. Cooperative banking also exists on a scale that rivals many of the largest banks in Canada, Britain, Spain, Italy and elsewhere. This shows that the model can be scaled up. Credit union branches already can be found in most communities, and are often linked by cooperative networks that give members full access to their accounts through other credit unions and ATMs, providing something comparable to the convenience of a major bank.
Credit unions are part of the cooperative movement, of which nearly half of Americans are already members. Cooperatives also include farmer co-ops like Land O’Lakes, marketing co-ops like True Value Hardware and Best Western, consumer cooperatives like REI, and rural electric co-ops that power three quarters of the nation’s landmass. Cooperatives combine the best features of the public and private sectors, and as the political debate between financial regulation and free markets builds to a shrill crescendo, we must not forget that there is another way.
The seriousness of our crisis has created a need for government intervention that is well beyond what would ordinarily be tolerated, and this will almost certainly spark a widespread re-evaluation of how the financial system should work.
Reverting to an interventionist stance will work temporarily, but it is ultimately no more likely to yield permanent solutions than previous attempts. The New Deal and Reagan Revolution were each seen as permanent fixes by their proponents, but they have become a vicious cycle. To prevent future crises, we must get beyond the tug-of-war between markets and government. We must seek stable, cooperative solutions.