In previous posts (1, 2, 3, 4, 5) I have identified and discussed how our current system of lending/borrowing is having significant negative effects on inflation, family values, heath care costs, family farms, and housing costs and which contributes to nearly every social problem today. In this post I will discuss the solution. We need a new system for lending and borrowing involving a sort of co-op anti-banking institution. Evidence that supports the need for such a co-op financial institution is found in the many co-op farms, grocery stores, insurance, and utilities popping up all over this nation. In our current system, nearly all profits go to the lender, while the individual borrower accepts all the risk. In a co-op financial, risk would be spread evenly across a community, as well as profits. The Community Safety Society would borrow ideas from Savings and Loans, Credit Unions, as well as Amish and Sharia Law Banking. Here is how it would work.
In our current system banks borrow our own tax dollars from the FED at prime (currently 0%), then according to fractional reserve banking they lend 10$ for every 1$ borrowed. I should have been a banker. When banks lend to us they need to make a profit, but they not only lend our own money back to us at a higher interest rate, they contractually bind us to an amortization schedule (instead of the balloon payment) that collects 95% interest for 20 years on a 30-year home loan. Their justification for such an obscene profit margin is the illusion of risk. Look at all the bank failures throughout history. But because of fractional reserve lending, and the bank creating money magically out of thin air, that means if people default on their loans, banks repo and sell their home and earn a nice profit. What kills banks is the practice of leveraging their fractional reserve dollars by trading them for stocks and derivatives. When the Stock and Derivative markets tank, the banks have lost their small fractional reserves and cannot lend or pay creditors. and then they go bankrupt. Our current system of indentured servitude and continual bank failures is designed this way on purpose. If home ownership is the American Dream, the home mortgage is the American Nightmare.
So, how should credit work that is immune to fluctuating markets? This system is partly based on Sharia Law Banking, Amish Banking, and Credit Unions. But as I do not entirely know exactly how all these work, I do know that both the Bible and the Qur'an have strict rules or prohibit the collection of usury or interest. This is not an anti-capitalist or free-market system. This is not a communist or socialist system. This is just a credit system that is non-profit, but profit-driven for its members, and is more fair and more immune to the instability of the markets. The name of our co-op anti-bank will be called a Community Safety Society (CSS).
First, the Community Safety Society will only deal with loans and credit on assets that have the potential to increase in value or appreciate and not on assets which will depreciate. That is, our anti-bank will invest in homes, home improvement, real estate, and business ventures. The CSS will not provide credit for automobiles and other depreciating consumer commodities.
2 Ne. 9: 51 Wherefore, do not spend money for that which is of no worth, nor your labor for that which cannot satisfy.
When a member of the CSS seeks to purchase a home, the CSS member will negotiate with the bank to prove his credit worthiness and apply for the bank to purchase the CSS member's property of choice. Instead of lending money to the individual which is in turn used to purchase the property, the bank will purchase the property outright. Instead of charging interest up front on an amortized loan, CSS will charge a modest transaction fee to cover administrative costs. The CSS member may be required to come up with capital as a down payment on the home purchase. This money would be paid to CSS in partial repayment of the property. If 10% were paid by the CSS member, then the CSS member would become a 10% owner of the property, and CSS would have 90% ownership. As monthly payments were made, the CSS member would increase his ownership and equity in the property right from the start until the property was entirely paid for and the CSS became a 100% owner.
Underwriting, Repayment and Foreclosure
1. Loan worthiness will be assessed based on set criteria including: quality and redeem-ability of the asset, collateral, credit history, reputation, and capacity or ability to pay.
2. Repayment will be in monthly payments until the CSS member becomes achieves 100% ownership and the loan amount is repaid.
3. The joint-ownership agreement and contract may contain a time period by which the CSS member must assume full ownership of the property or asset.
4. There is no penalty for extra payments. The CSS member can achieve full ownership at any time.
5. If the home is sold before the CSS member has become full owner and the home is sold for a profit, those profits are divided between the anti-bank and the CSS member according to their percent ownership. Property and business value could be assessed annually and the repayment adjusted accordingly.
6. If the home looses value and is sold at a lose, then the CSS member and the bank share that lose according to each parties percent ownership. I currently prefer this arrangement over putting all the liability on the CSS member who could instead decide to not only default on the loan but also declare bankruptcy instead of take the full responsibility of the lost value of the home. However, I could change my mind.
7. If the CSS member is unable to make payments on the home, the home owner may be bought out by the bank. Every missed payment would detract from the CSS member's equity and ownership of the property until all equity and ownership was forfeited. Having immediate equity in the property would provide an insurance for the CSS member during periods of unemployment. If the CSS member could no longer make payments on the property and had divested himself of all ownership and equity, then the CSS anti-bank could then repossess the property, resell it, and retain any profits.
8. The CSS anti-bank may or may not operate on fractional reserves. Liquidity must be available to make purchases of assets and to satisfy savings withdrawals. If the anti-bank were allowed to lend based on fractional reserves, the bank would be liberated from the risks of CSS members defaulting on their mortgage arrangements. The CSS anti-bank must be able to buyout the home owners who default on their contract. Upon resale of the home, any lost resale value in the home would be factored into the buyout.
9. Reputation of the CSS member would be an important consideration in the decision to enter into any joint-contractual agreements. CSS would attempt to be fair, equitable, and non-discriminatory but as a private co-op-like business, the bank would need to be discriminating based on values and risk determined by its members and governing boards. Amish banking is a great example of using reputation as part of the underwriting process.
10. The greatest threat to CSS would be corruption and rejecting founding principles while being seduced to behave more like a traditional bank. CSS anti-bank could provide debit-cards and checking account services, provide travelers checks, money exchange, and may give loans against home equity for home improvement. Giving loans for cars or other assets that depreciate in value would not be permitted. CSS does not give loans, it purchases assets.
11. CSS would not exchange currency for derivatives. They may exchange currency for municipal bonds from the community. CSS would only invest in stock and stock options when investing in local business who they are in contractual joint-ownership. This would insulate the bank from market volatility outside the community.
12. CSS may apply for non-profit status. Dividends and profits paid to CSS investors and part-owners would be taxable, but CSS itself would reinvest any and all profits into the community.
13. CSS will undergo independent third-party auditing and accounting.
Savings and Dividends
CSS Members who open savings accounts with the CSS co-op anti-bank will exchange their currency for part ownership in the CSS. Currency would be exchanged for securities like a stock. When the CSS makes a profit on its investments, those profits will be shared as dividends with all its members according to thier percent ownership in CSS.
Run of the Anti-Bank
In the event of a run on the bank, and members making significant withdrawals of their savings and divesting themselves of part-ownership in the bank, much of the CSS capital will be locked up in property, business assets, and business stocks. CSS could make arrangements to sell these assets to their part-owners at a discount to raise the necessary capital. KSS members who are part-owners of a property or business could buyout the CSS anti-bank using currency obtained through a traditional banking loan.
CSS leadership and government will be administered by an executive board with board members elected by the general membership. The governing executive board will appoint a president. The executive board and any hired support staff will receive appropriate hourly compensation for their positions. The level of compensation will be determined by the executive board.
This concept of the Community Safety Society is by no means a finished product. I only recently started thinking about it. This is a work in progress that I hope will solve a critical problem in our country and in the world. This kind of co-op system is working in other communities right now. Co-op Farming, insurance, and even grocery stores are strong evidence for the need for financial reform. Co-op banking would replace the need for co-ops in all these individual areas as all businesses would essentially be co-ops already through the co-op CSS anti-bank.
Community-Based Farming, Community-Supported Agriculture, and Crop Sharing spreads the risks associate with farming to the whole community and not just onto the farmer. Farmers are paid upfront by community members to farm. If there is a bumper crop, the individual community members receive weekly deliveries of fresh produce. If a heavy rain causes tomatoes to split, then the community gets split tomatoes. If there is a crop failure, the community loses out on fresh produce, but the farm remains in business to try again next year. The farmer can sell excess produce to grocery stores and farmers markets.
Co-op Grocery Stores are making loyal customers part-owners in the business and paying out dividends.
Saving and Loan Failure
There were several factors which led to the S&L crisis in the 1980's. First, there was a dip in the housing marking and in housing prices. A slow housing market means less home mortgages and their associated fees. Second, interest rates were at an all time high which made borrowing money from the FED very expensive. The US government passed an unfair law limiting the amount of interest an S&L could offer on its accounts. This cut into the profit margin of the S&L's who had guaranteed obligations to pay generous interest on member CD's. Many investors took their money out of S&L's to invest elsewhere at a higher rate. S&L's began speculating in world markets and investing in risky foreign companies and ventures. S&L's suffered from internal corruption and lack of external oversight and regulation such as independent accounting and auditing. The Tax-Reform Act of 1986 ended the practice of tax-sheltering money in real estate. Deregulation allowed S&L's to behave more like banks and take bigger risks and they over extended themselves competing for investors. S&L's were exploited by a practice known as linked financing by deposit brokers. In this scam, deposit brokers promise banks new investors if they also lend to these same borrowers who were given money to invest and apply for a loan. These sham lenders/borrowers then turn around and give the borrowed money to the broker who then declares bankruptcy and defaults on the loan.