“Pay it back, pay it forward”

In the commercial banking and lending model, shareholder returns in the public markets are dependent on charging high interest rates on loans (the most extreme example of this being the payday lending industry; less extreme examples being established financial institutions such as JP Morgan, Wells Fargo, Bank of America, etc.).

Commercial banks and lenders generate high returns by leveraging the strength of their brands and the fact that less established consumer customers typically have an immediate need for capital when they go to borrow money. This allows lenders to charge these customers premium interest rates, specifically on unforeseen unsecured debt needs.

But excess returns on unsecured debt should never be used to compensate stockholders, and the alternative future of unsecured consumer lending is cooperative instead. And there already exists strong examples of cooperatively minded banking institutions in the United States today –  a pivotal reason why most people are unaware of this (and why most individuals take the “de facto” commercial banking model for granted) is the deregulation that occurred in the name of free-market capitalism during the 1980s.

The narrative that evolved around the savings and loan crisis specifically in the late 20th century gave the entire mutual banking industry a bad rap in the United States. Interest rate fluctuation and the mishandling of government deregulation, not the core concepts of the cooperative banking model itself, compromised the financial position of in the mutual savings bank industry. Following the disruption, thrift conversions (single step process of offering shares in the mutual banking institutions to the public) were a highly attractive investment opportunity for private capital, providing ample incentive for widespread abandonment of the model altogether.

Its time cooperative banking made a comeback.

Credit unions are a less common form of non-profit cooperative financial institution, managed by groups of people with a "common bond." Groups of people with this common bond pool their funds to form the institution's deposit base; the group then owns and controls the institution together. Membership in a credit union is not open to the general public but is restricted to people who share the common bond of the group that created the credit union. Typically examples of this common bond are working for the same employer, belonging to the same church or social group, or living in the same community. Credit unions seek to encourage savings and make excess funds within a community available at low cost to their members.

Until the 1970s, credit unions offered only savings accounts and consumer loans. Now, however, credit unions' financial powers have expanded to include almost anything a bank or savings association can do, including making home loans, issuing credit cards, and even making some commercial loans. Credit unions are exempt from federal taxation and sometimes receive subsidies, in the form of free space or supplies, from the sponsoring organizations.

But credit unions manage only a tiny fraction of the total financial capital available to consumers (billions as compared to trillions). The three largest commercial banks in the U.S. all manage over $2tn in assets, while the third largest credit union manages on $25bn in assets.

Credit unions can do everything that commercial banks can do but are hamstrung by regulations that mandate strict membership criteria and dampen growth of the asset base.

What if equity investments and charitable contributions were used to grow the “deposit base”? Remutualization of the financial services industry in the United States and a cooperative banking resurgence is the most viable path forward for the financial services industry in the United States.

In 1904 at the age of 31, Amadeo Peter Giannini was a successful fruit-and-vegetable merchant in San Francisco. One day, he got into a shouting match with the head of a local bank about its reluctance to make small loans to individual borrowers. Afterwards, Giannini founded the predecessor to Bank of America (originally calling it the Bank of Italy).

Less than two years later, a devastating earthquake struck the bay area. The only reason that Bank of America survived was because Giannini reacted quickly after seeing fires head towards his physical retail banking location in the aftermath of the earthquake. He loaded the bank’s $80k of hard assets (gold and cash) into wagons, cleverly hiding the valuable assets under crates of oranges to protect them from looters.

Consumer retail banks originated as a physical place to store and protect physical money. Giannini did this exceptionally well by successfully protecting his bank’s physical capital (the deposits of individuals that trusted Giannini to protect their money) during the aftermath of the earthquake.

Giving your savings to a bank is a way to mitigate the risk of theft. Plus, if you have more than even a tiny amount of money – even if you aren’t concerned about theft – carrying it around with you is relatively impractical. Banking services outsource security and storage of monetary value. Banking services offer peace of mind for individuals who don’t want to have to carry a physical representation of their entire net worth around with them.

Fast forward to 2020. We kind of just use banks because we “always have” and sort of have to use them.

JP Morgan Chase is a diversified financial services company. 50% of the company’s revenue comes from its large retail bank. JP Morgan Chase’s retail bank makes money the same way that Giannini did with Bank of Italy / Bank of America in 1904. JPM takes deposits from individuals (promising to keep their money safe, today benefitting from some additional help from the Fed in the form of FDIC insurance) and then uses the multiple trillions in capital from deposits to extend mortgage loans, auto loans and credit card loans to other individuals.

And that’s basically it.

Store money for people and make money by loaning it out. The bank makes the spread between the savings rate it offers and the interest rates that individuals pay on the loans. 50% of JP Morgan’s business model is premised on offering individuals a safe place to store their money.

But this is confusing.

This is confusing because I have never seen or touched a gold bar. I’ve never been paid in anything but dollars. And, furthermore, I haven’t been paid in cash dollars since I was mowing lawns in high school. I don’t even carry cash in my wallet anymore. I don’t really need anyone to hold onto cash or gold bars for me.

Physical money is out. Virtual money is in.

Correct me if I am wrong, but it feels like when I give my money to JP Morgan today, I am really just saying that I think they are the best virtual ledger company. Like the best company at organizing things in lists and not messing the lists up. And the best at keeping track of all of this virtually. And the best at being really responsive when I want to talk to a customer service representative. Joe has $101. Nick has $30. Julia has $240. Etc.

Consumers continue to use JP Morgan because they have a strong brand. But philosophically that brand comes from the fact that over the last 100 years, you could trust JP Morgan to hold onto your gold bars for you while you were off living your life (the bankers want you think it’s complicated but it’s note).

The funny thing is that ANY blockchain is just as good as JP Morgan at maintaining a virtual ledger. In fact, a large enough blockchain maintained by a decentralized network is almost certainly better than JP Morgan at maintaining a virtual ledger. And by using a Trezor or Ledger wallet, it’s possible for anyone to store virtual currency maintained on a virtual ledger in an incredibly secure way (just as secure as with a bank). Plus, I can choose to either “hedge” national institutional risk by exposing myself to bitcoin or have the option to buy and hold stable coins which are pegged to the U.S. dollar instead.

So why do banks exist?

5/29/2020

Edward Abbey demonstrates powerful rhetorical skill in his above phrasing. Which I guess is expected given his profession as a writer and essayist. And due to the equivalence established between growth and cancer, the above quote is largely effective when used as a tool to condemn unchecked, modernist economic expansion. But the quote actually misses the mark.

In reality, growth for the sake of growth is the ideology of all biological matter. Humans are driven to reproduce. It’s baked into our DNA. Charles Darwin. Etc. The reason why cancer is especially bad is not because it grows to grow but because when it grows it grows unchecked and destructively. It grows at an immense cost to the other biological matter around it. Cancerous growth is antithetical to the idea of symbiosis. A more apt description might be the following…

“Indiscriminate, unharmonious growth is the ideology of a cancer cell”

That’s what Edward Abbey was really railing against when he condemned growth for growth's sake – unchecked growth at a high cost to the organism. And he was right. The institutions that exist in the United States have increasingly allowed for the unchecked growth of cancerous companies, industries and ideologies. And the stay-at-home orders and subsequent slowdown in the economy has offered us an opportunity to take a breath and reflect.

Growth of the prescription pharmaceutical industry is cancerous. Growth of big oil. Growth of healthcare insurance and Medicare fraud. Growth of snack foods, fast foods, sugary beverages, credit cards and payday lending. Cancerous. Cancerous and incredibly hard, if not impossible, to stop once started. The growth has inertia. The growth has individuals behind it. Fighting for it. Rationalizing it. Stuck depending on the growth to maintain a certain position in society, care for loved ones or just take home a paycheck.

How do you stop cancer? You can attack it with chemical warfare. You can cut it out. You can starve it of the material and input that it needs to survive.

Harvard Health “estimates suggest that less than 30% of a person's lifetime risk of getting [and sustaining] cancer results from uncontrollable factors”, but that everyone has the power to control the other 70%. Antioxidants, low GIs foods and exercise are important for cancer prevention as they help to neutralize free radicals that damage cells. High GI foods, smoking and weight gain are associated with higher cancer risk.

The idea of letting numbers and figures and logic and profitability alone (i.e., financial statements) determine the winners and losers in a competitive economic game is seductive. Numbers are imbued with an inherent sense of fairness and are useful to organize and maintain power hierarchies. But basing the entire economic system off of numerical, quantifiable financial inputs and outputs is akin to eating a diet of pure sugar. Indulgent. Gratifying. Dopamine-stimulating. Addictive. Inflammatory. Sedating. Depression-inducing. Cancer-causing.

As a society we have reached a turning point. Due to the spread of technology and the ever-increasing democratization of information flow, network effects and social capital are slowly becoming a more important driver of behavior and attention than financial capital for the creative class and younger generations. The foundations which establish the optimal conditions for cancerous economic growth are beginning to decay. This is a good thing given how destructive it is to – economically speaking – subsist on a diet consisting only of financial returns and cash flows (i.e., pure sugar).

Returns to emotional well-being. Returns to environmental sustainability. Returns to community engagement. These are some of the key components of a healthy economic diet. These are the “vegetables” that the free market capitalists push to the corner of the plate.

U.S. consumer spending fell by a record 13.6% in April. Pundits are predicting a recovery (meaning a return to prior expenditure levels), but it’s important to consider what a true “recovery” from our previous sugar high actually looks like.

Consider for a moment that if production and consumption both drop together, we simply come to rest at a different equilibrium. We don’t need endlessly increasing production. Only the asset owners and the banks need that.

5/27/2020

There’s a reason for the giving pledge…

And it shouldn’t stop with billionaires.

The giving pledge is a commitment by the world’s wealthiest individuals and families to dedicate the majority of their wealth to giving back. It started with Bill and Melinda Gates and Warren Buffet, but pledgers now range from hedge fund managers like Bill Ackman to founders like Sara Blakely. SBF is a proponent of the related effective altruism movement. Per the givingpledge.org website there are currently 209 total pledgers. A good start.

Whatever criticisms you may have about how the giving pledge is structured or the details of how money is given and net worth is measured, the pledge is a fundamental recognition by the most “successful” among us of an underlying truth belied by the liberalistic grand narrative in the United States: the myth of meritocracy. Participation in the giving pledge requires practically incomprehensible financial success, either by the individual herself or the individual’s predecessors, and joining in the pledge garners significant recognition. But it shouldn’t be that way.

In the free market economy, capital is thought to accumulate to those who make the right investment decisions in the right place and at the right time (whether it be an investment of time, money, etc). Seems reasonable. The people who are good at putting potential energy where it should go should be the ones who get to decide where the rest of the potential energy goes. Theoretically.

But the gamification of capital allocation naturally follows from the nature of free market monetary capital and its alienation from the essence of creation and production. And this gamified capital allocation game is not collaborative. And it’s not as efficient as it could be. And it doesn’t leave room for the role of storytelling. Or the role of politics. Or the role of luck.

And, furthermore, social capital is subsequently misattributed is large quantities to individuals who succeed at the money game. Note that this is backwards – it should be monetary capital following social capital, as monetary capital originated as an accounting system for standardizing and codifying amorphous, latent social capital so that we could cooperate on a larger scale.

The value of any productive work is largely arbitrary and immeasurable and dependent on preexisting and future productive work. As is the value of any capital allocation decision. And the net worth of any individual or family or value of any company is largely arbitrary as well in that it is the sum and result of such an infinitude of interactions and thoughts and ideas and dependencies so as to make the thought of attributing the success of an idea or story or product or investment decision to a single person absurd.

Warren Buffet does not live a life of opulence and performative superiority over those who contribute in other ways because of his particular talent or skill at investing (true for successful artists, entrepreneurs, athletes, etc. as well). The social capital, freedom of choice and societal respect that he derives from his work is the efficient accounting mechanism. His place at the table as a respected capital allocator is the prize, not the influence and power and hedonism and superiority he could obtain - in a vacuum - simply by spending his money. There are others that understand and embody this. Primarily though and at lower levels of wealth, most of us don’t.

The gamification of the accounting system that we use to track reciprocity and social capital invalidates the very system itself. We need to separate the method of accounting from essence of cooperative co-creation. In the future, the giving pledge should and will be universal.

5/26/2020

What is money?

Common answers to that question range from definitional – “a medium of exchange” – to lofty and idealistic – “freedom”, “independence” or “autonomy”.

Money is multifaceted and hard to wrap your head around. Most people avoid thinking about money because it's stigmatized. Maybe they have been made to believe that they are bad at math. And developing a healthy relationship with money is difficult. Humans learn mimetically but exemplary money consciousness is rare among the general public.

Whether in the form of dollars, gold or bitcoin, money at the most fundamental level is nothing more or less than a power structure used to harness and control raw potential energy. More specifically, money is the accounting system through which any individual can accumulate, store, access and spend that raw potential energy. In physics, physical potential energy is the energy held by an object because of its position relative to other objects, stresses within itself, its electric charge or other factors. The monetary value of a bank note is the potential energy held by the bank note due to its relative position and relationship with competing bank notes and the individuals who trade their labor for them.

Sure – you might say – but, in the physical world, gravitational potential energy is derived from the relationship of two bodies in physical space… so where does the raw potential energy in money come from?

Consider for a moment that the raw potential energy in money is nothing more or less than accumulation of past reciprocity and cooperation between individuals. At smaller scales, to receive money you must provide a valuable service over a period of time. Being compensated or paid in dollars simply means that you can take the good deeds that you do for one individual and benefit from the “reciprocity” of another individual that didn’t necessarily benefit directly from your original labor. Money allows for the delocalization of the norm of reciprocity, if you will.

Note how money also is the tool used to hold that reciprocity hostage.

The tricky thing about raw potential energy is that it acts on the other bundles of raw potential energy around it. The denser or heavier the ball, the more potential energy it accumulates when lifted from the ground and also the more counter gravitational force it exerts on the earth itself. Accumulated reciprocity is no different. There is a weight, heaviness and density to accumulated reciprocity. As it is conceptualized and allocated today, money passively and powerfully attracts further monetary value (accumulated reciprocity) on its own. And those who don’t have much money leak what they do have to the people with larger accounts. The payday lending industry is a striking example of this. We are seeing this real time in crypto.

Through this frame, it makes sense that guilt and stigmatization so frequently come hand in hand with gaining money or losing money or being gifted money or lacking money. Because intuitively we all know that the way money is distributed and allocated today is a partial bastardization of the norm of reciprocity.

How can we build a world where money is what money should be and monetary capital and social reciprocity are aligned? Blockchain technology makes this alignment possible but not guaranteed. It requires the proper institutions - no different than any other form of social organization - to do so.