The St. Louis Fed’s Community Development department recently brought together national and local experts with community leaders across the Eighth District to discuss the changing needs and focus of the community development sector, as well as to encourage the sharing of innovative ideas and programs. The full proceedings may be viewed here.
Here is a summary of the remarks made by Ray Boshara.
Several periods in our American history can be studied to understand what has influenced our “social contract.” one key period is from the 1890s to 1920s, which is known as the progressive era. The progressive era is characterized by social insurance and safety nets, such as the creation of the new deal and the Federal Reserve. Today, we as a nation suffer symptoms of a broken and outdated social contract and are in what’s been dubbed the Next Progressive Era, marked by income inequality and zero job creation, among other economic indicators. To remedy this, Boshara advocated a turn away from a national goal of consumption and toward that of production, an environment that favors entrepreneurism and small business over its recent trend toward consolidation, and a move toward building assets and capital, rather than simply income, especially among low-income individuals. He advocates relationship banking, specifically citing the value of community banks, credit unions and CDFIs. The current recession indicates that we are coming to an end of an economic era. He concludes that the next social contract and what replaces the American consumer as the engine of our economic growth has yet to be decided, and states if there was ever a time to innovate, ever a time to be bold, ever a time to have impact with local, state and national leaders, the time is now.
KEY TAKEAWAYS:
• The economy has been growing over the last generation, but it’s not growing evenly. The returns of a growing economy increasingly are going to those at the top and leaving a lot of people with marginal growth or no growth whatsoever.
• According to the Fed’s 2007 Survey of Consumer Finances, the lowest 25 percent of the population (net worth), plunged 37 percent from 2004, before the economic downturn. One in eight Americans has a debt problem; one in four if you’re poor. One in three Americans has a net worth of less than $10,000 and one in six has a negative net worth. How can these families move forward without some stock of resources? Inequality is not the problem; the issue is that low income people do not have the capital to move their lives forward.
• Beginning in the 1930s, American consumers drove economic growth. American consumption, no matter where it’s made, accounts for more than 70 percent of economic growth in the U.S., and 25 percent of the world’s economic growth.
• The problem is that we financed that consumption through debt. We became overleveraged at the household level and at the national level. One of the reasons the house of cards came down is that we could not absorb any more debt.
• In the 10-year period from 1999 to 2009, there was zero net job creation in the economy.
• Why have we not created enough new jobs to offset the ones being destroyed? We have too much concentration in too many industries stifling entrepreneurship and stifling innovation. This started around 1980 when regulators came to redefine what is fair and not fair about whether to allow companies to consolidate. Massive consolidation stifles innovation and entrepreneurship.
• We need to see more community banks, credit unions and CDFIs. In 1985, there were about 14,000 community banks; there are about half that many now. For every $1 of capital or equity into a community bank, it returns $7 to $8 in loans to families and businesses; the leveraging is remarkable. One of the sources of this capital should be savings and IDAs from low income people. But to really thrive, community banks need access to long-term patient capital, and Boshara would like to see the creation of a fund or trust that gives access to this patient capital.
• Relationship banking has to be at the heart of how we manage finances, make loans and generate savings. We need to have relationships back in the equation. The trend over the last generation is to have more space between borrowers and lenders, which led to the mess we’re in right now. If we went back to relationship banking/community banking, we can restore the trust. The failure rate of big banks is seven times the rate of community banks.
• Focus on accumulating capital at the individual and household level. Use an asset-building framework; not just income, but assets are necessary to get ahead. Lack of income means you don’t get by; lack of assets means you don’t get ahead. When you own things you feel different; you are engaged in the community, you take care of things. If low-income people own assets, it changes their outlook and behavior; they plan for their kids’ futures in ways they didn’t before.
• When low-income people are given the opportunity to save and build wealth, they do it. The poorest of the poor save a greater percent of their income than the better-off poor. It’s not a matter of income or race.
