On Common Good Finance: “this is not just another bank with a social agenda. This is a social agenda with a bank!” http://www.commongoodbank.com/

October 2008

Non capitalist banking is essential, absolutely fundamental, to any socialist project and it is genuinely heartening to see it being worked on like this. So I wouldn't want my criticisms to be seen as anything other than constructive.

That said, mutual banks, credit unions, and micro credit organisations already do the sort of thing being proposed here. The perceived advantage of this seems to be take exploit the current unfair advantage that stock issuing (capitalist) banks have in the regulatory framework.

But stock comes with drawbacks too:

“Also, by design, stock will be so easy to buy and sell, through simple transfers to and from a checking account, that depositors will be happy to choose a higher interest rate than they receive for their ordinary deposits.”

Hmm, I wonder about that. Someone wishing to sell stock will first need to find a buyer. The bank itself will be unable to buy back stock easily or quickly because of the requirement to keep 8% (in Massachusetts) of deposits as capital. So the person wishing to sell stock will have to sit around and wait for a private buyer to turn up, or for the bank itself to shrink its deposits and lending enough to have spare capacity to retire stock. For a small bank, that could be a long wait. Realistically share swaps in small banks would perhaps be performed one day a year, say on the 1st April, only. And even then there would be no guarantee sellers would be able to get all their money out. They might have to wait for the next year to come round. That'll scare away a lot of potential small scale investors, like me. Pretty much only rich people can afford to sink money away for years in long term investments. If you're poor, you need liquidity.

So is this really going to work better than credit unions for small scale local democratic banking? Well, I don't know: I've only skimmed through the proposals so far, maybe that's already been worked out somehow. But that no bank, even a small one, has yet been set up after several years of dedication and commitment suggests the problems I am foreseeing could be real.

For a big state wide bank with millions of depositors it would work though. There a big enough market in shares would develop for them to be liquid investments. Perhaps that is the way to take this idea?

But another problem is that stock ownership is inherently risky. It is not (or at least it should not be, $700 bn bailouts aside) insured by FDIC (US) / FSCS (UK).

Whether or not the bank aims to pay a dividend of prime-1.5% or not, hard times like now may prevent it from doing so. And in the event of a bank failure even the initial purchase price of stock would be lost. For example, stock in this, otherwise similar, Community Development Bank has dropped from a constant $10 down to $4 in the last 4 months http://www.snl.com/irweblinkx/stockinfo.aspx?iid=1024752 with the deflation of the housing bubble.

Albina Community Bank, Portland, Oregon

Community Development Banks are big and successful in the US, and they already issue stock and more or less attempt to do some good with their lending. They try to pay serious dividends to stockholders, which we none of us like, but maybe that is the best that can be done in trying to square the circle of capitalist stock-issuing banks with socialist aims?

If we want socialist banks (and I for one do) then I think we maybe have to bite the bullet and dispense with stock ownership for those. That credit unions and so on are hobbled from competing on an even playing field against capitalist banks by state regulation and legislation is outrageous, but maybe changing the rules through political action is the best way to deal with that problem.